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BANKING  REFORM  IN  THE 
UNITED  STATES 


ADDRESS 

OF 

NELSON  W.  ALDRICH 


BEFORE  THE 
ACADEMY  OF  POLITICAL  SCIENCE 

NEW  YORK,  OCT.   15,   1913 


BANKING  REFORM  IN  THE 
UNITED  STATES 


ADDRESS  ^  ^  ^ 

OF 

NELSON  W.  ALDRICH 


BEFORE  THE 

ACADEMY  OF  POLITICAL  SCIENCE 

NEW  YORK,  OCT.  15,   1913 


v\& 


9/V^'~ 


.K*^ 


NOTE  TO  SECOND  EDITION. 

Since  the  following  address  was  read  before  the  Academy  of  Political  Science, 
the  "Federal  Reserve  act"  has  become  a  law.  The  Senate  and  the  Democratic 
caucus  practically  remodeled  the  measure,  ehminating  many  of  the  objectionable 
features  of  the  House  bill,  and  modifying  provisions  which  had  been  subjected 
to  severe  criticism.  The  act  as  finally  adopted  will,  I  beUeve,  be  accepted  by  the 
national  banks  with  a  view  of  seeking  in  good  faith  to  make  its  operation  a  practical 
success  and  with  the  hope  that  defects  may  be  cured  by  subsequent  legislation. 

Whether  the  measure  will  meet  the  expectation  of  its  friends  will  depend 
largely  upon  the  manner  in  which  it  is  administered.  Its  success  will  depend, 
first  of  all,  upon  the  character  and  wisdom  of  the  Federal  Reserve  Board,  which 
is  granted  extraordinary  powers  of  control  over  vast  interests  and  intrusted  with 
the  decision  of  the  intricate  questions  which  are  involved  in  the  various  pro- 
visions of  the  act.  Very  much  will  also  depend  upon  the  conservative  character 
of  the  management  of  the  several  Federal  Reserve  banks. 

The  act  adopts  many  of  the  principles  of  the  bill  reported  by  the  National 
Monetary  Commission,  as  will  be  seen  by  a  comparison  of  the  texts  of  the  two 
measures.  Its  authors  concede  that  effective  legislation  for  banking  reform  must 
embody  provisions  for  the  concentration  and  mobilization  of  bank  reserves 
through  an  organization  of  banks,  and  that  member  banks  must  be  able  through 
such  an  organization  to  maintain  and  replenish  their  reserves  by  a  rediscount  of 
commercial  paper.  Whether  the  organizations  provided  by  the  act  will  secure 
these  results  in  a  satisfactory  manner  can  be  ascertained  only  by  experience. 

If  the  loaning  and  note  issuing  power  of  the  reserve  banks  is  used  to  the  fullest 
extent  in  ordinary  times  as  anticipated  by  some  of  the  authors  of  the  act,  these 
institutions  will  be  found  powerless  in  case  of  emergency  for  purposes  of  support 
or  protection.  The  adoption  of  this  poHcy  would  naturally  lead  to  an  expansion 
of  credit  and  inflation  of  the  currency,  producing  an  appearance  of  prosperity 
and  a  boom  in  speculative  prices,  but  the  ultimate  result  would  be  disastrous. 

N.  W.  A. 

Warwick,  January,  1914. 


284679 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/bankingreforminuOOaldrrich 


BANKING  REFORM  IN  THE  UNITED  STATES. 


Any  intelligent  criticism  of  legislative  proposals  for  banking 
and  monetary  reform  must  be  based  on  a  knowledge  of  existing 
conditions  and  of  the  present  and  prospective  needs  of  the 
country,  and  a  clear  understanding  of  the  defects  to  be  cured 
and  the  evils  to  be  avoided,  as  well  as  the  nature  of  the  remedies 
to  be  adopted.  The  magnitude  of  the  interests  to  be  affected 
favorably  or  unfavorably  by  suggested  changes  should  lead  us 
to  exercise  the  greatest  care  in  the  formation  of  our  judgments, 
and  to  see  to  it  that  we  are  not  influenced  in  our  opinions  by 
local  or  other  prejudices.  Statistics  are  available  to  show  the 
extent  of  the  banking  interests  directly  affected  by  monetary 
legislation,  but  we  cannot  possibly  measure  the  magnitude  of 
the  interests  which  the  American  people  of  every  community, 
of  every  section,  have  in  the  wisdom  or  unwisdom  of  suggested 
changes.  The  number  of  stockholders  and  depositors  in,  and 
borrowers  from  our  banking  institutions  is  greater  than  that  of 
the  adult  population  of  the  country.  The  people  who  have  the 
deepest  direct  interest  in  the  efficiency  and  good  management 
of  our  financial  institutions  are  the  active  business  men  through- 
out the  country,  whose  enterprise  has  earned  for  the  United 
States  the  first  place  in  the  world  of  industry  and  commerce. 
The  people  who  will  suffer  most  from  injurious  changes  will 
be  the  wage  earners  and  the  great  mass  of  people  engaged  in 
productive  industries. 

CHARACTER  AND   MAGNITUDE   OF   OUR   BANKING   SYSTEM. 

The  current  report  of  the  Comptroller  of  the  Currency  shows 
that  we  have  in  the  United  States  approximately  29,000  state 


and  national  banks  (about  22,000  state  and  7,000  national)^ 
with  resources  in  excess  of  25,000  millions  of  dollars.  The 
rapid  growth  of  our  banking  facilities  in  recent  years  is  shown 
by  increases  from  1900  to  1912,  in  the  number  of  institutions, 
from  about  13,500  to  29,000;  in  banking  resources  from  10,785 
million  dollars  to  24,986  millions;  in  loans  and  discounts  from 
5,657  millions  to  13,953  millions;  in  individual  deposits  from 
7,239  millions  to  17,024  millions.  The  increase  in  population 
between  1900  and  1912  was  twenty-two  per  cent,  while  the 
increase  in  banking  resources  was  one  hundred  fifty-eight  per 
cent.  The  wise  management  of  these  banks,  for  in  the  main 
the  management  has  been  wise,  and  the  judicious  use  of  these 
enormous  banking  resources  have  been  perhaps  the  most  im- 
portant factors  in  promoting  the  growth  and  securing  the 
unexampled  prosperity  of  our  agricultural,  commercial,  and 
industrial  interests  in  recent  years. 

Every  community  in  the  United  States,  large  or  small,  has 
one  or  more  banks.  The  managers  of  these  banks  are  men 
f amiUar  with  the  wants  of  their  customers  and  they  are  usually 
accepted  as  the  financial  advisers  of  their  neighbors.  In  all 
matters  affecting  the  prosperity  of  the  neighborhood  in  which 
they  are  located  their  advice  and  judgment  are  often  sought 
and  usually  followed.  The  intimate  and  important  relations 
existing  between  banks  and  bankers  and  the  people  and 
communities  should  be  carefully  considered  in  any  examina- 
tion of  the  provisions  of  suggested  legislation. 

GENERAL  CONDITIONS  DEMAND  REFORM. 

The  exceptional  record  of  the  successful  growth  of  our  bank- 
ing interests  to  which  I  have  referred  has  been  coincident  with 
the  unexampled  prosperity  of  the  country.     We  must  not, 


however,  lose  sight  of  the  fact  that  our  great  banking  resources 
have  been  found  in  serious  emergencies  powerless  to  avert 
general  disaster.  Our  banking  system  has  broken  down  when 
subjected  to  any  very  severe  strain.  While  there  is  nothing  in 
present  or  prospective  business  conditions  that  should  occasion 
alarm,  we  must  remember  that  financial  troubles  often,  in  fact 
usually,  come  unheralded.  Even  the  causes  that  produce  them 
even  can  never  be  definitely  stated.  It  is  evident  that  in  the 
near  future  the  adequacy  of  our  banking  facilities  is  to  be  tested 
by  new  demands  for  credit  in  addition  to  our  normal  business 
requirements.  In  magnitude,  unusual  demands  at  home  and 
abroad  for  additional  credit  and  for  the  placing  of  new  loans  by 
states  and  industrial  organizations  have  never  been  equaled. 
Demands  of  this  nature,  world-wide  in  extent,  impose 
new  and  greater  burdens  upon  the  banking  resources  of  the 
world.  With  the  close  business  and  financial  relations  which 
modern  conditions  have  established  between  the  great  commer- 
cial nations,  each  country  must  bear  some  share  of  these  new 
responsibiUties.  The  need  of  the  states  of  the  near  East  to 
fund  indebtedness  contracted  during  the  late  conflict  and  to 
enable  them  to  repair  the  ravages  of  war  adds  largely  to  the 
usual  European  demand. 

In  Europe,  fear  that  grave  political  problems  may  not 
always  be  found  capable  of  peaceful  solution,  and  dread  of  the 
evil  effects  of  an  undue  expansion  of  credit  in  some  quarter,  are 
disturbing  elements.  The  high  rates  demanded  for  government 
and  other  loans,  the  impossibility  of  floating  long-time  loans  at 
any  rate,  are  evidences  of  unsettled  and  unsatisfactory  condi- 
tions in  the  world's  money  markets.  In  the  United  States  our 
financial  institutions  will  be  called  upon  to  meet  insistent 
requirements  of  steam  and  electric  railroads  and  industrial 
corporations  for  new  loans  to  pay  for  necessary  improvements 


8 

and  extensions,  and  to  refund  maturing  obligations.  Govern- 
ment and  other  large  borrowers  will  be  obliged  to  pay  rates 
which  a  few  years  ago  would  have  been  considered  extor- 
tionate. The  effect  of  recent  tariff  legislation  on  business 
and  government  revenues  is  yet  unknown.  These  conditions 
taken  together  naturally  create  a  feeling  of  uncertainty  in 
all  financial  centres.  The  enormous  shrinkage,  amounting  to 
thousands  of  milHons  of  dollars,  which  has  recently  taken 
place  in  the  value  of  securities  and  property  in  the  United 
States,  furnishes  evidence,  whatever  may  be  the  cause,  of  a 
want  of  confidence  in  our  continued  prosperity  on  the  scale 
of  our  past  achievements. 

These  among  other  considerations  should  lead  us  to  exercise 
the  greatest  care  in  the  selection  of  remedies  for  admitted  de- 
fects in  our  banking  system.  The  people  of  this  great  country, 
with  all  the  momentous  consequences  involved,  cannot  afford 
to  venture  on  untried  experiments,  or  to  adopt  principles  or 
methods  that  have  been  rejected  by  the  teachings  of  universal 
experience.  We  cannot  measure  the  direful  results  which 
might  follow  revolutionary  changes.  Any  remedial  legislation 
should  be  constructive  and  not  destructive.  We  should  seek 
to  strengthen  rather  than  weaken  the  efficiency  of  our  credit 
organization.  We  should  supplement  rather  than  supplant 
a  system  which  has  grown  to  such  enormous  proportions  under 
state  and  national  laws,  and  to  which  the  business  of  the 
country  has  with  more  or  less  satisfactory  results  become 
adjusted. 

CHAKACTER  OF  THE  REFORM  DEMANDED. 

To  secure  a  wise  and  comprehensive  reform  of  our  banking 
and  monetary  system,  we  require: 


9 

1.  An  efficient  banking  organization  by  which  bank  sus- 
pensions and  financial  crises  with  their  evil  results  can  be 
avoided. 

2.  Means  to  secure  a  concentration  of  cash  reserves  of  the 
banks  and  their  mobilization  for  use  whenever  and  wherever 
needed  in  times  of  trouble.  In  times  of  stress,  scattered  re- 
serves of  banks  have  been  found  useless,  either  for  defense  or 
protection.  The  scramble  of  25,000  banks  in  1907,  each  to 
take  care  of  its  own  interests  and  to  increase  its  own  cash 
reserves,  contributed  very  largely  to  the  panicky  conditions 
which  led  to  general  disaster.  Banks  must  be  furnished  with 
effective  means  for  replenishing  their  reserves  and  increasing 
their  loaning  power  at  times  when  the  need  for  credit  expansion 
is  imperative. 

3.  The  general  cooperation  of  banks  must  be  secured  to 
protect  their  own  or  the  public  interests  when  these  are  menaced 
and  when  individual  or  local  efforts  are  ineffectual  to  prevent 
the  paralysis  of  business  and  domestic  exchanges. 

4.  An  organization  must  be  provided  that  can  deal  effec- 
tively with  conditions  which  imperil  the  credit  and  status  of  the 
United  States  as  one  of  the  great  financial  powers  of  the  world. 
In  times  of  threatened  trouble  or  actual  panic,  the  power  to 
control  the  movements  of  gold  and  the  course  of  foreign  ex- 
change through  raising  the  rates  of  discount  or  otherwise  is 
essential,  from  both  a  national  and  an  international  standpoint. 

5.  We  must  have  an  organization  whose  influence  can  be 
made  effective  by  an  advance  in  discount  rates  or  otherwise  in 
preventing  an  undue  expansion  or  dangerous  inflation  of  bank 
credits. 

6.  A  currency  should  be  provided  that,  in  character  and 
volume,  in  contraction  as  well  as  in  expansion,  will  be  respon- 
sive to  normal  or  unusual  demands.     Seasonal    or   unusual 


10 

demands  for  currency  or  credit  for  crop  moving  or  other  pur- 
poses have  at  times  produced  very  unsatisfactory  conditions 
in  the  money  market  owing  to  the  inelastic  and  unscientific 
character  of  our  monetary  system. 

7.  A  broad  discount  market  must  be  created  with  recognized 
and  legaUzed  standards  of  commerical  paper.  Recent  conditions 
also  impose  unnecessary  burdens  upon  business  and  production, 
and  hinder  the  natural  development  of  certain  sections  of  the 
country.  These  evil  results  are  felt  more  keenly  in  new  and 
undeveloped  communities.  The  lack  of  such  a  discount  market 
leads  banks  in  all  sections  to  send  surplus  money  to  New  York 
to  be  loaned  there  on  stock  exchange  securities. 

The  methods  necessarily  used  in  raising  the  enormous  sums 
required  for  the  production,  movement,  and  marketing  of  our 
agricultural  and  other  products,  are  crude  and  unnecessarily 
expensive  to  producers.  Notes  and  bills  of  exchange  issued 
or  drawn  for  agricultural,  commercial,  or  industrial  pur- 
poses, can  be  discounted  only  in  a  narrow,  local  market, 
and  the  result  has  been  that  our  farmers  and  all  others 
engaged  in  productive  industries  have  been  obliged  to  pay 
higher  rates  for  their  loans  and  have  been  placed  at  a  great 
disadvantage  in  securing  the  credit  which  they  have  required 
and  to  which  they  are  fairly  entitled,  for  the  growth,  retention, 
and  distribution  of  their  products.  The  adoption  and  use  of 
proper  standards  for  such  commercial  paper  would  enable  our 
banks  profitably  to  replace  in  their  portfolios  speculative  low- 
rate  loans  of  all  kinds  with  notes,  bills  of  exchange,  and  accept- 
ances, based  on  the  products  and  property  of  the  country.  If 
this  change  can  be  made,  it  will  prevent  the  dangerous  conges- 
tion which  takes  place  at  times  in  the  great  financial  centres. 
It  is  difficult  to  understand,  in  this  connection,  why  national 
banks,  which  are  authorized  by  the  House  bill  to  accept  drafts 


11 

growing  out  of  transactions  involving  importation  or  exporta- 
tion of  goods,  are  not  permitted  to  accept  domestic  drafts  of  the 
same  character.  Why  should  a  bank  in  Mississippi  or  Texas 
be  permitted  to  accept  the  draft  of  a  cotton  planter  on  Liver- 
pool, based  on  cotton  shipments,  when  it  could  not  accept  the 
drafts  of  the  same  planter  on  a  domestic  consumer?  Why 
should  an  importer  in  New  York  have  better  facilities  than 
the  western  farmer  who  ships  his  grain  to  an  eastern  market? 

EFFECTIVE  REMEDIES  SUGGESTED  BY  EUROPEAN  EXPERIENCE. 

While  there  seems  to  be  a  general  agreement  as  to  the  nature 
of  the  reforms  demanded,  unfortunately  there  is  no  such  con- 
sensus of  opinon  as  to  the  methods  and  machinery  which  should 
be  employed  in  securing  the  desired  results.  This  is  to  be 
regretted,  as  it  seems  certain  from  the  experience  of  other 
nations  that  simple  and  effective  remedies  for  defects  are 
easily  within  our  reach.  While  we  have  suffered  greatly 
in  almost  every  decade  of  our  history  from  the  evil 
effects  of  financial  crises,  the  people  of  the  great  commercial 
countries  of  Europe  have  been  entirely  free  for  nearly  half  a 
century  from  disastrous  losses  arising  from  this  cause.  This 
exemption  may  be  said  to  be  due  solely  to  the  character  and 
efficacy  of  their  credit  and  banking  organization.  The  ex- 
perience of  England  and  France,  and  later  of  Germany,  in  this 
respect,  has  led  all  the  important  commercial  nations  of  the 
world  except  the  United  States  to  follow,  in  the  essential 
features  of  their  credit  organization,  in  the  foot-steps  of  these 
great  countries.  The  adoption  within  a  few  years  by  Sweden, 
Switzerland,  and  Japan  of  banking  organizations  along  the 
lines  of  the  countries  I  have  referred  to,  completes  the  ad- 
herence of  the  commercial  world,  outside  of  this  country,  to 
one  general  banking  and  monetary  policy. 


12 

CRITICISM   OF   THE    BILL. 

In  considering  the  character  of  the  remedies  proposed  by  the 
bill  which  recently  passed  the  House  of  Representatives  I  am 
not  unmindful  of  the  fact  that  it  is  much  easier  to  criticise  than 
to  construct,  and  I  certainly  do  not  intend  by  any  criticism 
I  may  make  to  increase  the  difficulties  of  legislators  charged 
with  serious  responsibilities,  but  rather  to  call  attention  to 
changes  which,  it  seems  to  me,  must  be  made  in  the  plan  in 
the  interest  of  wise  and  permanent  legislation.  The  authors 
of  the  bill  having  in  a  majority  of  cases  accepted  remedies  of 
the  character  I  have  suggested  and  adopted  ideas  based  on 
experience  of  other  countries,  and  on  sound  economic  principles, 
it  is  all  the  more  to  be  regretted  that  in  some  of  the  most 
important  provisions  of  the  bill  the  lessons  of  experience  have 
been  ignored. 

My  suggestions  with  reference  to  certain  provisions  of  the  bill 
are  made  with  the  hope  that  they  may  prove  of  service  to  those 
who  have  the  bill  in  charge,  in  their  difficult  task  of  perfecting 
the  measure.  It  is  certainly  desirable  that  the  American 
people,  whose  highest  interests  are  to  be  affected  favorably  or 
unfavorably  by  congressional  action,  should  have  as  clear  an 
understanding  as  possible  of  the  nature  of  the  proposals. 

The  two  features  of  the  bill  which  are  open  to  the  most 
serious  objection  are,  first,  the  provisions  which  authorize  the 
issue  of  government  notes  to  be  circulated  as  money  and  loaned 
on  collateral  security  to  the  federal  reserve  banks  created  by 
the  bill;  second,  the  provisions  which  create  a  government 
board  which  can  be  accurately  described  as  a  government 
central  bank  of  an  objectionable  type. 


13 

NOTE   ISSUES. 

The  proposals  with  reference  to  note  issue  are  radical  and 
revolutionary  in  their  character  and  at  variance  with  all  the 
accepted  canons  of  economic  law. 

It  can  hardly  be  necessary  for  me  to  recount  in  this  pres- 
ence the  disastrous  results  which  have  inevitably  followed  the 
issue  of  paper  money  by  governments  or  states.  I  need  only 
remind  you  of  our  own  colonial  and  continental  experiences. 
That  of  France  at  the  time  of  John  Law  and  the  French  Revolu- 
tion is  equally  significant.  In  exceptional  cases,  like  our  own 
experience  with  United  States  notes,  where  continuous  depre- 
ciation has  not  ended  in  absolute  worthlessness  of  issues,  the 
losses  arising  from  the  use  of  a  depreciated  currency  have 
greatly  exceeded  any  possible  financial  benefits  which  have 
resulted  from  the  violation  of  economic  laws.  Competent 
authorities  estimate  the  greater  cost  of  our  civil  war,  owing  to 
the  use  of  depreciated  currency,  at  more  than  five  hundred 
millions  of  dollars. 

In  all  cases  of  government  issues,  when  the  resulting  ex- 
pansion and  inflation  have  brought  about  instability  of  con- 
ditions and  values,  those  dependent  upon  wages  and  salaries 
and  those  engaged  in  agricultural  and  other  production  have  been 
the  principal  sufferers,  while  the  capitalists  and  speculators  who 
could  take  advantage  of  constantly  changing  conditions  have 
been  the  only  classes  who  have  been  benefited.  This  con- 
dition has  never  been  better  characterized  than  by  Daniel 
Webster,  who  said: 

^'Of  all  the  contrivances  for  cheating  the  laboring  classes 
of  mankind,  none  is  so  effectual  as  that  which  deludes  them 
with  paper  money.  It  is  the  most  perfect  expedient  ever  in- 
vented for  fertilizing  the  rich  man 's  fields  by  the  sweat  of  the 


14 

poor  man's  brow.  Ordinary  tyranny,  oppression,  excessive 
taxation,  these  bear  lightly  on  the  happiness  of  the  community 
compared  with  fraudulent  currencies  and  the  robberies  com- 
mitted by  depreciated  paper.  Our  own  history  has  recorded 
enough,  and  more  than  enough,  of  the  demoralizing  tendency, 
the  injustice  and  intolerable  oppression  on  the  virtuous  and 
well-disposed,  of  a  degraded  paper  currency,  authorized  by  law, 
or  in  any  way  countenanced  by  Government."* 

Peletiah  Webster,  writing  in  1781,  after  the  total  volume 
of  Continental  paper  money  had  become  worthless,  said: 

''We  have  suffered  more  from  this  than  from  any  other 
cause  or  calamity.  It  has  killed  more  men,  pervaded  and  cor- 
rupted the  choicest  interests  of  our  country  more,  and  done 
more  injustice  than  even  the  arms  and  artifices  of  our  enemies. "f 

Leading  enconomists,  financiers  and  statesmen  of  every 
shade  of  political  belief  have  joined  in  the  condemnation  of  the 
use  of  the  obhgations  or  notes  of  governments  as  a  circulating 
medium.  On  this  subject  the  views  of  Alexander  Hamilton 
who  beheved  in  a  centraHzed  national  government,  were  fully 
concurred  in  by  General  Jackson  and  Mr.  Benton  and  the 
leading  statesmen  who  represented  opposite  views  of  govern- 
ment and  of  currency  and  banking  questions. 

Mr.  Hamilton  said  in  his  report  of  1790: 

''The  emitting  of  paper  money  by  the  authority  of  Govern- 
ment is  wisely  prohibited  to  the  individual  States  by  the 
national  constitution,  and  the  spirit  of  that  prohibition  ought 
not  to  be  disregarded  by  the  Government  of  the  United  States. 
Though  paper  emissions,  under  a  general  authority,  might  have 
some  advantages  not  applicable,  and  be  free  from  some  dis- 
advantages which  are  applicable  to  the  like  emissions  by  the 

♦Congressional  Globe,  27th  Cong.,  2d  sess.,  app.,  p.  65. 
tHorace  White,  Money  and  Banking,  4th  ed.,  p,  92. 


15 

states,  separately,  yet  they  are  of  a  nature  so  liable  to  abuse — 
and,  it  may  even  be  affirmed,  so  certain  of  being  abused — that 
the  wisdom  of  the  Government  will  be  shown,  in  never  trusting 
itself  with  the  use  of  so  seducing  and  dangerous  an  experiment." 

I  will  quote  the  views  of  General  Jackson  and  Mr.  Benton 
later. 

Among  American  economists,  the  position  and  authority  of 
Professor  C.  F.  Dunbar  will  not  be  questioned.  I  know  of  no 
political  economist  of  standing  in  this  country  who  will  not 
agree  that  the  following  statement  of  Professor  Dunbar  sets 
forth  the  sound  economic  doctrines  that  should  control  our 
note  issues: 

^'The  necessary  conclusion  from  our  experience  with  the 

legal  tender  notes  plainly  is  that  a  government  currency,  under 

our  conditions,  is  an  unfit  subject  for  national  legislation. 
****** 

'The  often-repeated  argument  that  a  government  issue,  being 
a  loan  without  interest,  results  in  a  saving  to  the  treasury 
which  is  lost  when  the  right  of  circulation  is  delegated  to  banks, 
is  frequently  resorted  to.  The  experience  of  the  United  States 
presents  a  complete  answer  to  this  penny-wise  reasoning. 
*  *  *  rpj^g  people  of  the  United  States  have  lost  by  shaken 
confidence,  discouraged  enterprise,  and  the  actual  ruin  of 
thousands  of  citizens,  resulting  from  the  mismanagement  of 
their  currency,  an  amount  beyond  all  comparison  with  the 
annual  saving  made  by  them  at  the  treasury,     *     *     * 

' 'Errors  made  in  the  past  will  be  also  made  by  the  new  men  in 
the  future;  and  the  possibility  that,  in  any  moment  of  popular 
discouragement  or  passing  delusion,  some  fresh  experiment  or 
abandonment  of  wholesome  limitation  may  be  resolved  upon 
in  haste,  but  with  irreparable  results,  must  continue  to  be  a 
standing  menace  to  our  credit,  pubUc  and  private.     *    *    * 


16 

''Experience  has  shown  that  we  can  rely  upon  no  principle  or 
policy  as  a  safeguard  against  the  caprice  or  the  temptation 
which  at  intervals  must  surely  beset  any  legislative  body  having 
control  of  the  direct  issue  of  paper/'* 

Among  British  economists,  Mr.  H.  D.  Macleod  is  perhaps 
the  leading  authority  on  banking  and  currency  questions,  and 
the  view  he  expresses  in  the  following  quotation  would  be 
universally  acquiesced  in  by  foreign  political  economists.  He 
says: 

^'Governments  and  states  should  never  issue  paper  money 
themselves.  WHien  states  and  governments  once  begin  to  issue 
paper  money,  they  can  never  resist  the  temptation  to  issue  it 
in  boundless  quantities,  so  that  it  soon  begins  to  depreciate. 
They  have  no  power  to  redeem  it:  and  the  depreciation  is 
incurable.^'t 

Citations  of  a  similar  character  could  readily  be  made  from 
the  opinions  of  all  leading  authorities,  from  the  pubUc  utter- 
ances of  statesmen,  from  the  views  of  the  representatives  of 
all  parties  and  of  all  classes. 

Note  issues  in  all  commercial  nations  are  made  through 
banks  of  issue  created  by  the  government;  all  the  conditions 
of  issue,  including  those  relating  to  character  and  amount 
are  fixed  by  government.  This  method  of  note  issue  finds 
universal  approval  in  all  enlightened  countries. 

In  the  thorough  reexamination  of  banking  and  monetary 
questions  which  has  recently  taken  place  in  Germany,  Switzer- 
land and  elsewhere,  no  representative  of  any  party  and  no 
individual  appeared  to  favor  the  substitution  of  government 
notes  for  bank  issues. 

*C.  F.  Dunbar,  Economic  Essays,  pp.  219,  225-7. 

tH.  D.  MacLeod,  Theory  of  Credit,  v.  2,  pt.  2,  p.  1105. 


17 

It  is  true  that  in  the  period  from  1814  to  1861,  Congress 
authorized  the  issue  of  treasury  notes  in  hmited  amounts, 
which  were  in  every  case  issued  as  evidences  of  indebtedness  on 
account  of  money  borrowed  to  meet  deficiencies  in  revenue  or 
expenses  growing  out  of  wars.  These  treasury  notes  were 
receivable  for  public  dues  and  were,  with  few  exceptions,  pay- 
able at  a  fixed  time  with  interest,  and  were  usually  in  denomina- 
tions that  precluded  their  use  as  currency. 

The  power  given  Congress  by  the  constitution  to  borrow 
money  clearly  involved  the  right  of  issue  of  securities  of  such 
character  and  in  such  form  as  Congress  might  determine,  and 
the  right  of  the  Government  to  issue  obligations  of  this  nature 
was  not  seriously  questioned  in  any  quarter.  Our  own  exper- 
ience prior  to  the  adoption  of  the  constitution  led  the  framers 
of  that  instrument  to  expressly  forbid  the  states  from  emitting 
bills  of  credit,  and  the  doctrine  that  the  issue  of  notes  of  the 
government  of  the  United  States  for  circulation  as  money  was 
not  authorized  by  the  constitution,  found  wide  acceptance. 

The  opinion  of  Professor  Woodrow  Wilson  was  that  generally 
held  by  statesmen  of  the  period.  In  his  history  of  the  United 
States,  he  says: 

'^It  (the  constitution)  absolutely  forbade  the  states  to  issue 
bills  of  credit,  did  not  give  the  federal  government  power  to  do 
so,  and  was  meant  practically  to  prohibit  the  use  of  any  currency 
which  was  not  at  least  based  directly  upon  gold  and  silver."* 

The  first  issues  of  United  States  notes  with  full  legal-tender 
quaUties  and  intended  to  circulate  as  money  were  made  during 
the  civil  war  and  grew  out  of  the  urgent  necessities  of  the 
government  at  that  time.  The  plea  of  necessity  was  the  only 
justification  urged  for  this  radical  departure  from  the  policies 
and  doctrines  of  the  founders  of  the  republic.     Excessive  issues 

♦Woodrow  Wilson,  History  of  the  American  People,  v.  4,  p.  46. 


18 


of  these  notes  and  the  repeal  of  the  right  to  exchange  the  notes 
for  interest-bearing  obhgations  of  the  United  States  produced 
the  usual  result  of  depreciation  and  discredit. 

The  reasons  for  the  general  condemnation  of  government 
note  issues  are  not  difficult  to  understand.  No  government 
has  yet  been  found  strong  enough  to  resist  the  pressure  for  en- 
larged issues  in  times  of  real  or  imaginary  stress^  or  to  meet  some 
real  or  fancied  exigency  in  its  own  affairs,  or  a  popular  demand 
for  more  money.  Issues  have  been  at  first  limited  in  amount 
and  surrounded  by  proper  safeguards  as  to  exchangeability 
and  convertibility,  and  by  what  seemed  to  be  ample  provis- 
ions for  ultimate  safety,  but  experience  has  shown  that  in  every 
case  in  response  to  a  popular  demand  these  safeguards  have 
been  one  after  another  ignored  or  removed,  restrictions  as  to 
amounts  of  issue  have  been  modified  or  repealed,  and  the  ex- 
hiliration  which  has  followed  the  initial  issues  has  led  to  an 
irresistible  demand  for  continuous  inflation,  and  this  has  been 
followed  by  progressive  depreciation,  a  necessary  destruction 
of  value,  and  general  bankruptcy. 

Some  of  the  friends  of  the  House  bill  who  do  not  like  to  be 
classed  as  advocates  of  the  further  issue  of  government  notes 
assert  that  the  notes  to  be  issued  are  after  all  notes  of  the  reserve 
banks  and  that  the  United  States  occupies  the  same  relation 
to  them  that  it  does  to  national  bank  notes. 

The  differences  are,  of  course,  perfectly  obvious  and  funda- 
mental. The  notes  to  be  issued  by  the  House  bill  are  by  its 
express  terms  '^  obligations  of  the  United  States, "  issued  for  the 
purpose  of  '^ making  advances  to  federal  reserve  banks,"  the 
banks  to  furnish  ''collateral"  and  to  pay  ''interest"  on  the 
loans.  National  bank  notes  are  in  terms  and  in  fact  obliga- 
tions of  the  national  banks.  The  treasury  under  the  banking 
law  redeems  national  bank  notes  for  the  national  banks  and 


19 

takes  as  security  for  any  failure  of  the  banks  to  respond  in 
payment  of  advances  United  States  bonds  equal  in  amount  to 
the  total  amount  of  bank-note  issues,  with  right  to  sell  at  any 
time  at  public  or  private  sale  without  notice.  In  the  one  case 
we  have  obligations  of  the  United  States  issued  by  a  govern- 
ment agent  and  loaned  to  reserve  banks.  In  the  other  case,  we 
have  obhgations  of  the  national  banks  with  a  pledge  of  Govern- 
ment bonds  to  secure  their  final  redemption  by  the  banks. 

EXPERIENCE   OF   FRANCE. 

In  this  connection  the  experience  of  France  in  1790  and  the 
years  following  with  the  issue  of  assignats  furnishes  valuable 
lessons.  France  had  confiscated  the  real  property  of  the  French 
church,  which  consisted  of  valuable  estates  in  town  and 
country  forming  about  one-third  of  the  real  property  of  France 
and  having  a  value  of  about  4,000  miUions  of  francs  and 
yielding  a  yearly  income  of  about  200  milUons.  The  first  issue 
of  notes  made  in  1790  was  limited  to  400  millions  of  francs,  and 
was  based  upon  a  specific  pledge  of  this  vast  property.  The 
holders  of  the  notes  had  a  right  to  exchange  them  for  the 
property  pledged  at  perfectly  satisfactory  prices.  The  argu- 
ments that  were  used  in  support  of  this  issue  have  a  famiUar 
sound.     It  was  contended : 

''Paper  money  under  a  despotism  is  dangerous;  it  favors 
corruption;  but  in  a  nation  constitutionally  governed,  which 
itself  takes  care  of  the  emission  of  its  notes,  which  determines 
their  number  and  use,  that  danger  no  longer  exists."* 

It  was  claimed  that  paper  so  limited  and  so  secured  was  as 
good  as  gold  and  that,  as  it  could  not  be  issued  in  excess,  there 
was  no  possibility  of  depreciation.  Great  stress  was  placed 
upon  the  fact  that  entirely  different  conditions  existed  in 
Law's  time,  and   that  with  a  free  government  and  new  con- 

*A.*D.  White,  Fiat  Money  in  France,  p.  4. 


20 

ditions  only  beneficial  results^ could  follow;  that  prosperity  and 
abundance  were  assured.  A  scientific,  practical  guarantee  of 
goodness  was  asserted  and  in  an  address  issued  by  the  French 
Assembly  it  was  said  that  the  paper  had  no  ''value  derived 
from  the  national  authority,  but  a  value  real  and  immutable; 
a  value  which  permits  it  to  sustain  advantageously  a  competi- 
tion with  the  precious  metals  themselves."  In  the  later 
discussions  it  was  asserted  that  the  precious  metals  would 
soon  be  used  only  in  the  arts,  and  a  currency  of  paper,  secured 
upon  the  first  and  most  real  of  all  property,  would  take  its 
place.  A  demand  was  made  later  for  an  issue  sufficient  in 
amount  to  pay  the  government  debt. 

No  paper  currency  ever  had  what  seemed  to  be  a  more  prac- 
tical guarantee  for  its  security  and  value.  It  was  based  upon 
what  was  then  and  is  now  the  highest  form  of  security,  a 
mortgage  on  productive  real  estate  of  unquestioned  value. 
The  notes  bore  interest  at  a  rate  of  three  per  cent,  per  annun^ 
and  this,  it  was  claimed,  would  insure  their  retirement  when  not 
needed.  Within  the  next  six  years  36  billions  of  assignats  and 
2,500  millions  of  mandats  had  been  issued,  and  then  the  collapse 
came,  and  the  whole  issue  became  worthless  and  was  repudi- 
ated. Conditions  at  the  end  of  this  period  are  thus  described  by 
a  historian  of  the  French  Revolution : 

''Before  the  end  of  the  year  1795  the  paper  money  was 
almost  exclusively  in  the  hands  of  the  working  classes,  employ- 
ees, and  men  of  small  means,  whose  property  was  not  large 
enough  to  invest  in  stores  of  goods  or  national  lands.  The 
financiers  and  men  of  large  means,  though  they  suffered  ter- 
ribly, were  shrewd  enough  to  put  much  of  their  property  into 
objects  of  permanent  value.  The  working  classes  had  no  such 
foresight,  or  skill,  or  means.  On  them  finally  came  the  great 
crushing  weight  of  the  loss."* 

♦Von  Sybel,  History  of  the  Revolution,  v.  iv,  pp.  337-8. 


21 


AMOUNT   OF   ISSUE. 


I  believe  it  will  be  found  that  there  is  no  substantial  limita- 
tion upon  the  amount  of  notes  that  can  be  issued  under  the 
House  bill  except  in  the  requirements  for  reserve.  It  is 
claimed  that  the  issue  is  Hmited  to  the  amount  applied  for  by 
the  reserve  banks,  and  that  the  aggregate  amount  of  applica- 
tions is  Umited  by  the  amount  of  paper  in  the  possession  of  the 
banks,  and  further  that  the  central  board  has  the  discretionary 
power  of  declining  applications.  It  is  impossible  to  say  what 
if  any  restraining  effect  on  the  volume  of  note  issues  these  pro- 
visions would  have.  The  demand  for  currency  in  increasing 
amounts,  under  ordinary  circumstances,  as  shown  by  our  own 
experience  and  that  of  other  countries,  is  insatiable. 

Selfishness  is  naturally  a  controlling  factor  in  business  cor- 
porations. We  may  be  certain  if  the  loan  is  a  profitable  one 
for  the  bank,  applications  will  be  made  and  insisted  upon.  If  a 
reserve  bank  could  hire  money  at  3^  per  cent,  or  1  per  cent  and 
loan  two-thirds  of  it  to  its  customer  at  4  per  cent,  5  per  cent, 
or  6  per  cent,  the  business  would  certainly  be  a  profitable  one, 
and  so  long  as  the  notes  could  be  kept  in  circulation  the 
amount  of  loans  and  note  issues  could  be  indefinitely  increased. 
The  power  of  the  reserve  banks  to  buy  in  the  open  market 
from  private  parties  commercial  paper  and  bills  of  exchange 
of  individuals,  firms,  and  corporations,  and  to  pay  for  their 
purchases  in  government  notes  and  to  furnish  the  cen- 
tral board  with  security  for  the  notes  by  a  deposit  of  the 
paper  purchased,  provides  another  method  of  profitable  note 
inflation. 

It  is  certain  that  the  central  board  would  find  it  difficult 
to  withstand  insistent  demands  made  on  behalf  of  communities 
or  the  public.     There  is  no  limitation  in    the    bill   of   the 


22 

amount  of  commercial  paper  that  a  reserve  bank  may- 
rediscount  or  purchase.  The  amount  of  the  loans  and 
discounts  of  all  the  banks  in  the  United  States  is  about 
fifteen  thousand  million  dollars  and  the  amount  of  securities 
held  by  banks  about  five  thousand  millions  more.  The 
House  committee  fixes  the  amount  that  would  be  available  for 
rediscount  by  the  reserve  banks  at  about  six  thousand  millions. 
In  my  opinion  this  amount  is  likely  to  be  largely  increased  by 
the  exercise  of  the  authority  given  the  central  board  to  fix  the 
character  of  the  loans  available  for  rediscount. 

It  is,  of  course,  problematical  what  portion  of  this  vast 
amount  could,  by  an  insistent  demand  for  money,  or  by  a  desire 
on  the  part  of  the  reserve  banks  to  increase  their  profits,  be 
made  available  as  security  for  loans  of  notes  from  the  central 
board.  If  notes  should  be  issued  in  place  of  national  bank  notes 
this  would  add  seven  hundred  millions  to  any  amount  other- 
wise required.  The  report  of  the  committee  states  that  it  is  in- 
tended that  the  government  notes  shall  take  the  place  of 
national  bank  notes,  but  the  bill  is  silent  upon  the  subject. 
The  commercial  paper  pledged  by  a  reserve  bank  as  the 
security  for  loans  of  notes  is  delivered  to  the  chairman 
of  their  own  board  of  directors  and  kept  in  his  custody 
in  a  vault  on  their  own  premises.  As  the  notes  fall 
due,  or  a  change  is  necessary  for  other  reasons,  a  substitution 
takes  place  under  the  direction  of  the  custodian,  and,  as  long  as 
the  necessary  amount  is  kept  intact,  the  loan  may  go  on  indefi- 
nitely. It  should  be  remembered  in  this  connection  that,  by 
the  various  provisions  for  redemption,  the  notes  issued  to  any 
reserve  bank  are  returned  to  it  by  other  reserve  banks  and  by 
the  treasury,  but  that  there  is  nothing  to  prevent  their  retention 
and  reissue  by  the  receiving  bank,  and  for  this  no  new  appli- 
cation is  necessary,  and  the  transaction  can  be  repeated. 


23 

We  may  expect  that  the  notes  will  become  a  permanent 
addition  to  the  currency  of  the  country,  as  currency  of  this 
character,  once  issued,  by  the  operation  of  the  Gresham  law, 
will  not  be  retired,  and  its  amount  will  constantly  increase. 
There  will  be  no  inducement  to  retire  it.  Each  one  of  the  federal 
reserve  banks,  by  the  provisions  of  the  bill,  is  forbidden  to  pay 
out  the  notes  of  any  other  federal  reserve  bank,  the  purpose 
being,  I  suppose,  to  attempt  to  secure  their  prompt  redemption. 
But  this  provision  would  not  be  effective,  as  no  such  prohibition 
applies  to  the  twenty-five  thousand  other  banks  in  the  country, 
or  to  the  business  men  and  people  in  whose  possession  the  notes 
would  be  found. 

With  extended  use  of  the  new  notes,  another  form  of  currency 
would  be  added  to  the  seven  already  in  existence,  and  if  the 
provisions  in  regard  to  the  use  of  letters  and  serial  numbers  to 
distinguish  notes  which  are  to  be  ultimately  redeemed  by 
particular  banks  should  give  a  greater  value  to  some  notes  than 
others,  as  might  be  the  case  if  the  proposed  earmarking  is 
successful,  we  should  have  twelve  additional  forms  of  currency. 

REDEMPTION   OF   GOVERNMENT   NOTES. 

The  methods  provided  by  the  bill  for  the  issue  and  redemption 
of  government  notes  are  unsatisfactory.  All  notes  are 
redeemable  on  demand  at  the  treasury  of  the  United  States  or 
at  any  of  the  federal  reserve  banks  in  gold  or  lawful  money. 
The  banks  are  required  to  deposit  with  the  agent  of  the 
Federal  Reserve  Board,  with  their  application  for  notes, 
commercial  paper  and  bills  of  exchange  equal  in  amount 
to  the  notes  applied  for.  Whenever  any  of  the  notes  received 
by  a  federal  reserve  bank  shall  be  paid  out,  the  bank  is  required 
to  segregate  from  its  reserves,  held  against  outstanding  obliga- 
tions, an  amount  in  gold  or  lawful  money  which  shall  be  equal 


24 

to  33f  %  of  the  amount  which  is  held  for  the  redemption  of  the 
notes.  The  notes  issued  to  any  federal  reserve  bank  are 
made  a  first  lien  upon  all  the  assets  of  the  bank. 

These  provisions,  if  effective  in  ordinary  times  when  there  is 
no  call  for  redemption  of  the  notes,  would,  I  believe,  fail  in 
times  of  trouble.  Take  a  condition  of  affairs  like  that  in  1907 
when  so  many  of  the  the  banks  of  the  country  suspended 
payment.  At  such  a  time  the  collateral  could  not  be  used  for 
redemption  purposes  and  the  lien  upon  assets  could  not  be 
enforced.  The  inadequate  means  of  redemption  by  the  reserve 
banks  would  fail  to  insure  immediate  convertibility  and  the 
treasury  might  be  obliged  to  assume  the  entire  burden.  But 
the  treasury  would  have  no  gold  or  other  lawful  money  in  its 
possession  available  to  meet  this  demand,  except  a  5%  fund. 
The  general  fund  of  the  treasury,  which  includes  its  gold  coin 
and  bullion,  would  be  deposited  in  the  suspended  banks,  and 
there  would  be  no  alternative  but  government  discredit  and 
repudiation  of  its  obligations. 

It  is  said  to  be  the  purpose  of  the  bill  to  consolidate  re- 
serves so  that  they  can  be  made  useful  at  any  time,  but  in  the 
case  of  reserves  for  note  issues  these  would  be  scattered  at 
twelve  different  points.  Even  if  the  reserves  were  consolidated 
and  held  in  a  manner  that  would  permit  their  use  they  would 
still  be  found  inadequate,  judging  by  the  experience  of  other 
countries. 

The  percentages  of  the  average  cash  holdings  of  the  three 
great  European  banks  for  the  ten  years,  1901-10,  to  note  issues 
and  all  demand  liabilities  were  as  follows : 

England.     France.  Germany. 

To  note  issues 86.6  84.5  72.5 

To  all  liabilities 47.4  72.9  50.4 


25 

Convertibility  of  note  issues  should  be  insured  by  adequate 
cash  reserves;  and  these  should  be  so  placed  and  held  that  they 
would  be  at  all  times  available  for  redemption  purposes. 

It  is  difficult  to  understand  why  the  proposition  to 
make  these  new  notes  redeemable  in  lawful  money,  that  is, 
in  other  obligations  of  the  United  States,  was  incorporated  in 
the  bill.  Bank  notes,  the  obligations  of  banks,  are  necessarily 
redeemable  in  lawful  money,  that  is,  in  any  form  of  money  which 
is  made  legal  tender  by  the  government,  but  the  same  rule 
should  certainly  not  be  applied  to  government  obligations. 
In  colonial  times  it  was  quite  common,  when  one  issue  of  notes 
had  become  practically  valueless,  to  authorize  their  redemption 
on  some  basis  in  new  notes,  and  this  process  went  on  continu- 
ously until  the  final  collapse  of  all  issues. 

In  considering  the  adequacy  of  the  reserves  proposed  for  the 
redemption  of  the  new  notes  I  have  not  overlooked  the  fact 
that  a  provision  is  inserted  which  gives  the  central  board  the 
right  to  require  the  reserve  banks  to  deposit  in  the  treasury  for 
redemption  purposes  a  fund  equal  to  5%  of  the  out- 
standing notes.  There  is  a  similar  provision  in  the  national 
banking  law  which  requires  a  5%  fund  to  be  deposited 
in  the  treasury,  but  this  fund  has  been  found  for  years  to  be 
entirely  inadequate  to  meet  the  demands  upon  the  treasury 
for  redemption  of  national  bank  notes.  The  Secretary  of  the 
Treasury,  in  his  last  report,  makes  this  statement : 

*' Redemptions  of  national  bank  notes  during  the  year  have 
been  constantly  in  excess  of  the  5%  redemption  fund 
required  under  section  3  of  the  Act  of  June  20,  1874,  to  be  kept 
by  the  banks  on  deposit  in  the  treasury  of  the  United  States 
for  the  redemption  of  their  notes.  Consequently,  that  fund 
has  been  overdrawn  during  the  whole  year  and  the  treasury  has 
had  to  advance  payment  for  notes  as  they  are  presented  out  of 


26 

the  general  fund.  The  largest  overdraft  was  $26,900,000  on 
February  3,  1912." 

These  serious  overdrafts  are  still  going  on,  and  in  some  con- 
ditions of  the  treasury  they  might  cause  serious  embarrassment 
to  the  government.  On  October  1  this  account  was  actually 
overdrawn,  $21,760,000. 

If  there  is  to  be  any  redemption  fund  held  in  the  treasury  it 
should  be  not  only  adequate  in  amount  to  meet  ordinary 
demands  but  sufficient  for  all  emergencies.  The  redemption 
fund  provided  in  this  bill,  as  well  as  the  redemption  fund  for 
national  bank  notes,  should  be  substantially  increased. 

EACH  KESERVE  BANK  RESPONSIBLE  FOR  REDEMPTION  OF  TOTAL 

ISSUE. 

Each  of  the  federal  reserve  banks,  notwithstanding  an 
attempt  is  made  to  make  it  responsible  only  for  notes  issued  to 
it,  would  be  practically,  and  it  might  be  actually  responsible  for 
the  redemption  of  the  total  issue,  as,  so  far  as  the  public  is  con- 
cerned, all  notes  without  distinction  as  to  whom  they  are  issued, 
are  entitled  to  redemption  at  any  one  of  the  reserve  banks 
as  well  as  at  the  treasury.  For  instance,  if  a  thousand 
millions  were  issued,  any  one  of  the  banks  would  be  required 
to  redeem  the  whole  or  any  part  of  this  on  demand,  and  this 
would  apply  to  a  federal  reserve  bank  to  which  no  notes  had 
been  issued  by  the  board.  It  must  be,  I  think,  apparent,  that 
with  any  considerable  amount  of  notes  outstanding,  with 
reserves  for  redemption  scattered  in  twelve  different  banks, 
any  of  the  reserve  banks  or  the  treasury  of  the  United  States 
would  be  likely  to  find  itself  in  a  position  where  it  would  be 
unable  to  meet  its  obligations  in  gold  or  lawful  money.  If  two 
hundred  million  dollars  in  these  notes  should  be  sent  to  the 
South  or  West  for  crop  moving-purposes,  one  or  two  reserve 


27 

banks  with  $5,000,000  capital  might  in  time  of   trouble  be 
called  upon  to  redeem  notes  greatly  in  excess  of  their  reserves 

or  resources. 

The  redemption  in  specie  of  the  United  States  notes  which 
were  issued  during  the  war  was  only  possible  after  the  accumula- 
tion of  one  hundred  millions  of  gold  coin  procured  by  the  sale 
of  government  bonds,  and  the  continuous  redemption  is 
assured  by  the  one  hundred  and  fifty  millions  of  gold  now  held 
in  the  treasury  as  a  trust  fund.  We  now  have  a  proposition 
to  issue  an  unknown  and  unlimited  amount  of  United  States 
notes  without  any  government  reserves  of  any  kind. 

NO   SECURITY   AGAINST   FRAUDULENT   ISSUES. 

Heretofore  in  legislation  looking  to  the  regulation  of  currency 
or  to  the  issue  of  government  obligations.  Congress  has  sur- 
rounded its  authorization  with  every  possible  precaution 
against  fraud.  Issues  of  currency  are  made  through  the  appro- 
priate bureau  of  the  Treasury  Department,  and  their  character 
and  denominations  are  fixed  by  Congress  itself.  In  the  case  of 
the  pending  bill,  the  Federal  Reserve  Board  is  authorized  to 
issue  obligations  of  the  United  States,  and  to  fix  their  character, 
form  and  tenor.  The  transfer  of  this  important  function  of 
government  to  a  board  whose  acts  are  not  subject  to  the 
supervision  of  any  department  of  the  government,  with  require- 
ment for  but  one  annual  report,  with  no  requirement  for 
publicity  of  transactions,  and  with  no  power  on  the  part  of 
any  representative  of  the  government  to  detect  or  punish  a 
flagrant  abuse  of  power,  has  no  precedent  in  the  history  of  this 
or  any  other  country. 

If  the  board  should  prefer  to  substitute  the  notes  which  it 
has  authority  to  issue  for  other  forms  of  currency  to  give  them 
a  wider  circulation,  it  might  easily  do  so,  by  providing  for 


28 

the  issue  of  the  new  notes  in  small  denominations  of  ones,  twos 
and  fives,  and  thus  drive  out  of  circulation  and  into  the  treas- 
ury and  the  banks,  silver  certificates  and  United  States  notes  of 
equivalent  denominations,  and  give  this  important  field  per- 
manently to  this  new  form  of  government  currency. 

RECORD   OF   THE   DEMOCRATIC   PARTY   ON   GOVERNMENT 
NOTE   ISSUES. 

The  reasons  given  to  justify  the  extreme  pressure  which  is 
being  brought  upon  Congress  to  enact  the  administration  bill 
is  that  its  adoption  is  necessary  in  fulfillment  of  promises 
made  by  the  dominant  party.  This  statement  would  seem  to 
justify  us  in  an  examination  of  the  record  of  the  party  to  ascer- 
tain when  and  under  what  circumstances  these  promises  were 
made.  Prior  to  the  civil  war  no  great  leader  of  the  Dem- 
ocratic party  advocated  the  issue  of  government  notes  to  be 
used  as  money,  as  proposed  in  this  bill.  After  the  panic  of 
1873,  the  efforts  of  the  friends  of  sound  money  to  secure 
the  resumption  of  specie  payments  and  their  insistence  that 
the  public  credit  could  only  be  sustained  by  the  payment  of 
all  government  obligations  according  to  their  tenor  in  stand- 
ard coin,  led  to  the  formation  of  a  party  which  was  opposed 
to  resumption  and  demanded  the  payment  of  government 
bonds  in  a  depreciated  currency  and  declared  for  the  first 
time  in  favor  of  the  issue  of  United  States  notes  in  substitution 
for  national  bank  notes.  These  opponents  of  resumption 
and  the  friends  of  further  inflation  and  of  the  free  coinage  of 
silver  included  members  of  both  pohtical  parties,  but  they 
were  not  strong  enough  in  the  early  stages  to  induce  either 
of  the  great  parties  to  openly  espouse  their  cause  in  national 
platforms. 


29 

The  greenback  sentiment  was  strong  enough  to  secure  the 
passage  of  an  act  in  1875  increasing  the  limit  of  United  States 
notes  in  circulation.  The  veto  of  this  measure  by  General 
Grant  was  an  effective  check  to  the  first  and  only  post  bellum 
attempt  prior  to  1913  to  secure  an  increased  use  of  government 
money.  The  Democratic  platform  of  1872  contained  an  empha- 
tic declaration  in  favor  of  a  return  to  specie  payments  and  a 
maintenance  of  the  public  credit,  and  denounced  repudiation 
in  every  form  and  guise.  The  failure  of  the  friends  of  inflation 
to  secure  the  formal  support  of  either  of  the  great  parties  to 
their  peculiar  views  led  to  the  formation  successively  of  the 
Greenback,  People 's,  and  Populist  parties. 

The  first  declaration  in  the  national  platform  of  any  party 
in  this  country  in  favor  of  a  further  issue  of  United  States 
notes  was  made  by  the  Greenback  convention  of  1876,  which 
declared  for  a  United  States  note  issue  directly  by  the  govern- 
ment, and  convertible  on  demand  into  United  States  obliga- 
tions. 

In  1875  the  Democrats  of  Ohio  demanded  that  the  policy  of 
contraction  should  be  abandoned,  that  the  resumption  law 
should  be  repealed,  and  that  the  volume  of  currency  and 
United  States  notes  should  be  made  and  kept  equal  to  the  wants 
of  trade,  and  that  these  notes  should  be  substituted  for  national 
bank  notes.  The  notable  campaign  in  Ohio  in  this  year  be- 
tween William  Allen  and  Hayes  resulted  in  the  defeat  of  Allen. 
In  the  following  national  campaign  the  Democrats  repudiated 
the  Ohio  idea  and  nominated  Mr.  Tilden  for  President  on  a 
platform  which  declared  that  reform  was  necessary  to  establish 
a  sound  currency,  restore  the  public  credit,  and  maintain  the 
national  honor. 

The  Democrats  in  their  platform  of  1880  reaffirmed  the  decla- 
ration of  1876  and  declared  for  honest  money  and  strict  mainte- 


30 

nance  of  public  faith.  The  Greenback  platform  of  that  year 
declared  that  all  money,  whether  metallic  or  paper,  should  be 
issued  and  its  volume  controlled  by  the  government  and  not 
through  or  by  banking  corporations. 

The  Democratic  convention  of  1884,  which  nominated  Mr. 
Cleveland  for  President,  declared  in  favor  of  honest  money  and 
the  gold  and  silver  coinage  of  the  constitution.  The  Demo- 
cratic convention  of  1888  renominated  Mr.  Cleveland  and 
reenacted  the  provisions  of  the  platform  of  1884.  The  Demo- 
cratic platform  of  1892  demanded  the  repeal  of  the  Sherman  act 
of  1890,  and  demanded  that  all  paper  currency  should  be  kept 
at  par  and  redeemable  in  coin,  ^^a  policy  made  specially 
necessary  for  the  protection  of  the  farmers  and  laboring  classes, 
the  first  and  most  defenseless  victims  of  unstable  money  and 
a  fluctuating  currency." 

The  attitude  of  leading  Democratic  statesmen  at  that  time  is 
shown  by  the  statement  of  President  Cleveland  in  his  mes- 
sage of  August,  1893: 

''The  people  of  the  United  States  are  entitled  to  a  sound  and 
stable  currency  and  to  money  recognized  as  such  on  every 
exchange  and  in  every  market  of  the  world.  Their  govern- 
ment has  no  right  to  injure  them  by  financial  experiments 
opposed  to  the  policy  and  practice  of  other  civilized  states,  nor 
is  it  justified  in  permitting  an  exaggerated  and  unreasonable 
reliance  on  our  national  strength  and  ability  to  jeopardize  the 
soundness  of  the  people's  money." 

Similar  expressions  representing  the  views  of  leading  repre- 
sentatives and  statesmen  of  the  party  of  the  period  could  be 
readily  cited. 

The  Democrats,  in  the  national  convention  of  1896,  which 
nominated  Mr.  Bryan  for  the  presidency,  announced  for  the  first 
time  their  adherence  to  the  doctrines  enunciated  by  the  Green- 


31 

back,  Populist,  and  Farmers'  Alliance  conventions  in  previous 
years.  Mr.  Bryan  received  the  nomination  of  the  Democrats,  the 
Populists,  and  the  Silver  party  on  practically  identical  platforms. 
As  the  advent  of  Mr.  Bryan  as  the  Democratic  nominee  marked 
a  new  era  in  the  history  of  the  Democratic  party,  and,  as  it  was 
persuaded  under  his  leadership  to  abandon  its  traditional  princi- 
ples, it  is  interesting  to  examine  in  detail  the  proposals  of  this 
new  political  combination.    The  Democratic  platform  provided : 

"  Congress  alone  has  the  power  to  coin  and  issue  money,  and 
President  Jackson  declared  that  this  power  could  not  be  dele- 
gated to  corporations  or  individuals.  We  therefore  denounce 
the  issuance  of  notes  intended  to  circulate  as  money  by  national 
banks  as  in  derogation  of  the  constitution,  and  we  demand 
that  all  paper  which  is  made  a  legal  tender  for  public  and  private 
debts,  or  which  is  receivable  for  dues  to  the  United  States,  shall 
be  issued  by  the  government  of  the  United  States,  and  shall  be 
redeemable  in  coin." 

The  platform  in  this  form  was  reported  by  a  majority  of  the 
platform  committee,  and  after  a  long  discussion  was  adopted  by 
a  vote  of  628  to  301.  The  minority  members  of  the  platform 
committee,  consisting  of  the  representatives  of  sixteen  States, 
which  included  such  well-known  Democrats  as  David  B.  Hill, 
of  New  York,  William  F.  Vilas,  of  Wisconsin,  Judge  George 
Gray,  of  Delaware,  Lynde  Harrison,  of  Connecticut,  and  John 
E.  Russell,  of  Massachusetts,  declared  that  "the  Democratic 
party  is  a  party  of  hard  money  and  is  opposed  to  legal-tender 
paper  money  as  a  part  of  our  permanent  financial  system." 
They  further  declared,  "We  therefore  favor  the  gradual  re- 
tirement and  cancellation  of  United  States  notes  and  treasury 
notes  under  such  legislative  provisions  as  will  prevent  undue 
contraction." 


32 

The  bolting  Democratic  convention  which  nominated  John 
M.  Palmer,  of  IlUnois,  for  President,  declared  for  '^such  intelli- 
gent currency  reform  as  will  confine  the  government  to  its 
legitimate  functions,  completely  separated  from  the  banking 
business,  and  afford  to  all  sections  of  our  country  uniform,  safe, 
and  elastic  bank  currency  under  governmental  supervision, 
measured  in  volume  by  the  needs  of  business." 

The  Democratic  platform  of  1900,  when  Mr.  Bryan  was  again 
a  candidate,  reenacted  the  currency  provisions  of  the  platform 
of  1896,  and  demanded  the  retirement  of  national  bank  notes 
as  fast  as  government  paper  and  silver  certificates  could  be 
substituted  for  them. 

In  the  Democratic  convention  of  1904,  which  nominated 
Judge  Parker  for  President,  there  was  a  notable  contest  in  the 
platform  committee  which  resulted  in  an  agreement  that  the 
platform  should  remain  silent  on  all  monetary  questions,  on 
the  theory  that  these  questions  had  been  settled  by  legislation 
and  events,  and  that  there  were  no  monetary  questions  at  issue 
in  the  campaign.  This  agreement  was  concurred  in  by  Mr. 
Bryan,  but  Judge  Parker's  telegram  to  a  member  of  the  con- 
vention, saying  that  he  regarded  the  gold  standard  as  affirma- 
tively and  irrevocably  established,  led  to  a  prolonged  discussion 
in  which  Mr.  Bryan  took  an  active  part,  but  his  ideas  with 
reference  to  the  government  issue  of  notes  were  not  adopted. 

The  Democratic  platform  of  1908,  when  Mr.  Bryan  was  again 
a  candidate,  in  addition  to  a  pledge  to  secure  legislation  for  a 
guarantee  of  deposits,  declared,  ^'We  believe  that,  in  so  far  as 
the  needs  of  commerce  require  an  emergency  currency,  such 
currency  should  be  issued,  controlled  by  the  federal  govern- 
ment and  loaned,  on  adequate  security,  to  national  and  state 
banks."  The  Democratic  platform  of  1912  was  silent  upon  the 
question  of  government  note  issue. 


33 


DOCTRINE    OF   THE    BILL. 


The  theory  that  the  United  States  should  issue  currency  in  the 
form  of  its  promises  to  pay  is  a  popuHstic  doctrine.  It  had  no 
standing  as  a  Democratic  party  principle  until  the  advent  of 
Mr.  Bryan  as  its  nominee  for  the  presidency  in  1896.  It  was 
injected  by  Mr.  Bryan  into  the  party  platform  in  spite  of  the 
protests  and  against  the  votes  of  the  men  who  had  been  most 
prominent  in  the  party  councils,  men  who  advocated  loyalty  to 
the  policies  and  principles  to  which  the  party  had  adhered 
throughout  its  existence.  This  greenback  doctrine  has 
never  received  the  approval  of  the  American  people  at 
the  polls  and  there  is  every  reason  to  suppose  that  it 
would  today  meet  with  their  positive  condemnation  if  the  ques- 
tion could  be  submitted  to  a  vote  in  a  national  election.  It  is 
not  too  much  to  say  that  the  proposals  in  the  bill  came  to  the 
country  as  an  absolute  surprise.  There  had  been  no  suggestion 
that  an  attempt  was  to  be  made  to  revive  the  greenback  heresy 
or  to  adopt  in  legislation  the  rejected  theories  of  the  Populist 
party.  The  Democratic  candidate  for  the  presidency  was 
silent  upon  the  subject  during  the  campaign  and  he  has  not, 
so  far  as  I  am  aware,  up  to  this  time,  publicly  expressed  his 
approval  of  Mr.  Bryan's  ideas  with  reference  to  note  issue. 
The  large  majority  of  the  American  people  who  favor  sound 
money  believed  that  the  question  of  further  greenback  issues 
was  settled  permanently  by  the  elections  of  1896  and  the  follow- 
ing years.  If  the  House  bill  should  be  enacted  into  a  law,  Mr. 
Bryan  will  have  achieved  the  purpose  for  which  he  has  been  con- 
tending for  a  decade.  It  would  be  difficult  to  find  in  history  an 
occasion  where  a  political  dogma  which  had  never  found  a  per- 
manent place  in  the  tenets  of  the  dominant  party  and  which  had 
been  rejected  by  unanimous  verdict  of  the  civilized  world  could 
be  successfully  injected  into  a  great  legislative  measure  as  a 


34 

price  for  the  support  of  a  faction.  It  is  not  surprising  that  Mr. 
Bryan  should  consider  the  insertion  of  his  pecuhar  views  into 
the  measure  we  are  considering  as  of  transcendent  importance. 
His  views  upon  this  subject  throw  such  an  important 
side-hght  upon  this  feature  of  the  bill  and  the  reasons  for  its 
incorporation  that  it  seems  to  me  desirable  to  quote  them  in  full. 
In  a  recent  letter  to  a  member  of  the  banking  and  currency 
committee  of  the  House  of  Representatives,  he  makes  the 
following  statement: 

^'The  provision  in  regard  to  the  government  issue  of  notes 
to  be  issued  by  the  banks  is  the  first  triumph  of  the  people  in 
connection  with  currency  legislation  in  a  generation.  It  is 
hard  to  overestimate  the  value  of  this  feature  of  the  bill. 

''In  the  second  place  the  bill  provides  for  government 
control  of  the  issue  of  this  money — that  is,  control  through  a 
board  composed  of  government  officials  selected  by  the  Presi- 
dent with  the  approval  of  the  Senate.  This  is  another  distinct 
triumph  for  the  people,  one  without  which  the  government 
issue  of  money  would  be  largely  a  barren  victory. 

''The  third  provision  of  the  bill,  which  I  regard  as  of  first 
importance,  is  the  one  permitting  state  banks  to  share  with 
national  banks  the  advantages  of  the  currency  system  proposed. 

"These  three  provisions  are,  to  my  mind,  of  such  trans- 
cendent importance  that  I  am  relatively  very  little  concerned 
as  to  the  details  of  the  bill." 

The  letter  was  written  to  a  member  of  the  House  upon  the 
eve  of  the  Democratic  caucus  called  to  act  upon  the  bill  and 
amendments.  While  this  frank  and  courageous  declaration  of 
Mr.  Bryan's  had  the  expected  result  of  solidifying  his  followers 
in  the  support  of  the  bill,  it  also,  I  venture  to  suggest,  opened 
the  eyes  of  that  numerous  portion  of  the  American  public, 
which  is  not  and  never  has  been  in  sympathy  with  his  opinions 


35  ^^--^Sc^^h'-^' 

on  this  subject,  to  the  dangerous  character  of  the  proposals  he 
commends  so  warmly. 

The  Bryan  proposition  as  now  made  and  accepted  furnishes  a 
plan  of  distribution  of  notes  that  is  skilfully  devised.  The 
printing  of  the  notes  is  a  simple  matter,  but  no  advocate  of 
greenback  theories  has  heretofore  been  able  to  suggest  any 
practical  way  by  which  they  could  be  put  in  circulation.  Mr. 
Bryan  himself  has  not  always  been  clear  upon  this  point. 
In  a  speech  made  by  him  in  1894  he  says : 

''If  it  is  said  that  we  must  institute  banks  of  issue  in  order 
to  put  money  into  circulation,  I  answer  that  there  is  a  better 
way.  The  issue  of  money  by  the  government  directly  to  the 
people  gives  us  a  safer  money  and  saves  to  the  people  as  a  whole 
the  profit  arising  from  its  issue.  When  a  bank  issues  money  you 
must  pay  the  market  rate  of  interest  in  order  to  get  it,  but  when 
the  government  issues  money  the  people  save  the  interest 
if  the  money  is  afterward  called  in,  and  they  save  the  principal 
also  if  the  money  is  kept  in  circulation.  Numerous  plans 
have  been  suggested  for  putting  this  money  into  circulation. 
Some  have  an  idea  that  a  government  issue  can  only  be  put 
forth  by  loaning  it  to  the  people,  either  directly  or  through  the 
agency  of  banks. 

''There  are,  in  my  judgment,  other  and  better  ways.  If  a 
limited  amount  is  issued,  and  of  course  the  amount  must  be 
strictly  limited,  and  it  is  loaned  to  the  people,  partiality  will  be 
shown  in  its  distribution,  for  only  a  few,  relatively  speaking, 
can  be  accommodated. 

"But  aside  from  the  danger  of  placing  so  great  a  power  in 
the  hands  of  the  dominant  party,  there  are  plans  more  just  and 
equitable  than  that  of  loaning.  The  money  can  be  used  to  pay 
the  expenses  of  the  government,  as  the  greenbacks  now  in  cir- 
culation were  used  to  pay  the  expenses  of  the  war.     If  Congress 


36 

decides  to  increase  the  currency  a  certain  amount  annually, 
say  for  illustration,  fifty  millions  a  year,  it  can  reduce  the  tax 
levy  to  that  extent  and  the  people  will  receive  the  benefit  of  the 
issue  just  in  proportion  as  they  pay  taxes,  for  they  will  save  to 
that  extent  the  taxes  which  they  would  otherwise  pay." 

Aside  from  its  announcement  of  general  principle  there 
are  two  points  in  this  quotation  that  are  worthy  of 
attention.  He  says  that  of  course  the  amount  must  be 
strictly  limited,  and  calls  attention  to  the  danger  of 
placing  so  great  a  power,  that  is,  the  power  to  loan  money,  in 
the  hands  of  a  dominant  party.  It  would  seem  that  Mr. 
Bryan's  ideas  upon  the  subject  are  progressive.  He  certainly 
could  not  have  anticipated  in  1894  that  it  would  be  possible  for 
him  to  secure  the  adoption  of  a  plan  of  distribution  much  more 
comprehensive  in  its  character  than  he  at  that  time  thought 
wise  to  advocate.  Mr.  Bryan,  in  his  letter  to  which  I 
have  referred,  reiterates  with  increasing  emphasis  the  state- 
ment that  a  government  issue  of  notes  through  a  board  of 
government  officials  is  a  distinct  triumph  for  the  people.  If  the 
method  of  distribution  by  loaning  notes  to  a  class  of  banks  is  a 
triumph  for  the  people,  why  not  make  the  triumph  more  definite 
and  beneficial  by  loans  on  similar  terms  to  all  banks,  or  to  all 
individuals  or  corporations  doing  business,  or,  better  still, 
directly  to  all  the  people?  If  the  proposals  for  note  issues  con- 
tained in  the  bill  are  really  in  the  interest  of  the  people,  why  not 
make  them  comprehensive  and  include  all  the  people  rather 
than  a  certain  privileged  class?  Why  not  give  the  people  the 
profits  of  issue  rather  than  confer  them  on  undeserving  middle 
men?  If  the  United  States  is  to  engage  in  the  business  of 
loaning  its  obligations  on  collateral,  then  logically  the  demand 
for  the  loaning  of  government  money  on  warehouse  receipts 
issued  on  deposits  of  cotton  and  grain  cannot  be  resisted. 


37 

It  is  not  surprising  that  Mr.  Bryan  and  his  followers  should 
be  but  little  concerned  as  to  the  other  details  of  the  bill. 
I  have  no  disposition  to  detract  from  the  credit  to  which  Mr. 
Bryan  is  entitled  for  the  victory  he  has  attained,  but  I  think  we 
have  a  right  to  ask  that  the  American  people  should  be  given  an 
opportunity,  under  the  circumstances,  for  a  full  hearing  upon 
the  question  before  a  judgment  is  rendered  adverse  to  their 
highest  interests. 

The  incorporation  of  the  provisions  for  government  note 
issues  in  the  administration  bill  is  certainly  a  great  personal 
triumph  for  Mr.  Bryan,  but  it  is,  at  the  same  time,  an  emphatic 
condemnation  of  the  theories  of  government  and  the  economic 
teachings  of  every  great  Democratic  leader  from  Andrew 
Jackson  and  Thomas  H.  Benton  to  Samuel  J.  Tilden  and 
Grover  Cleveland.  It  is  undoubtedly  true  that  the  support  of 
Mr.  Bryan  and  his  followers  was  necessary  to  secure  any 
legislation  upon  this  subject,  but  it  is  unfortunate  that  to 
secure  this  support  it  seemed  to  be  necessary  to  sacrifice  the 
cherished  principles  and  traditions  of  a  great  party. 

The  ascription  by  Mr.  Bryan  of  transcendent  importance  to 
the  issue  of  government  notes  by  a  government  board,  taken 
together  with  the  propositions  which  have  been  offered  by  two 
leading  members  of  the  Senate  committee,  to  issue  United 
States  notes  in  place  of  gold  certificates,  national  bank  notes, 
and  government  bonds,  indicate  that  the  bill  as  it  now  stands 
is  but  the  first  step  in  a  revolutionary  program.  The  bills  I 
refer  to  contemplate  the  issue  of  two  dollars  of  United  States 
notes  to  take  the  place  of  one  dollar  of  gold  certificates  which 
are  to  be  retired,  the  gold  retained  in  the  treasury  to  be  issued 
as  a  reserve  for  the  new  notes  issued  on  a  fifty-per-cent  basis. 
The  gold  upon  which  gold  certificates  have  been  issued  is  held 
as  a  trust  fund  by  the  United  States  under  a  solemn  pledge  made 


38 

in  the  act  of  1900  that  it  shall  not  be  used  for  any  other  pur- 
pose. The  exchange  suggested,  if  carried  to  its  conclusion, 
would  result  in  unbounded  inflation. 

The  policy  of  issuing  gold  certificates  based  on  a  deposit  of 
gold  was  adopted  deliberately  and  with  wisdom  as  a  means  of 
providing  a  currency  absolutely  safe  under  all  circumstances, 
and  to  secure  and  encourage  the  use  of  gold  through  its  repre- 
sentatives. To  abandon  this  policy  and  use  the  gold  through 
manipulation  of  notes  for  other  purposes,  not  only  would 
involve  the  good  faith  of  the  government,  but  would  be  ex- 
tremely dangerous  from  the  point  of  view  of  the  public  interest. 
The  fact  that  proposals  of  this  kind  have  been  made  by  respon- 
sible legislators  points  the  way  which  is  sure  to  be  followed  if 
we  once  enter  upon  the  poUcy  of  government  note  issue. 

THE   TYLER   PLAN. 

In  the  proposals  to  create  a  Federal  Reserve  Board  and  to 
provide  for  the  issue  of  government  notes,  the  authors  of  the 
House  bill  followed  a  plan  submitted  by  President  Tyler  to 
Congress  in  1841  for  the  creation  of  an  Exchequer  Board. 
It  is  quite  natural,  perhaps,  that  Virginians  should  follow  a 
Virginian  President  in  the  preparation  of  a  plan  but  the  selec- 
tion made  is  a  matter  of  surprise.  President  Tyler,  after 
having  vetoed,  on  constitutional  grounds,  a  bill  to  establish  a 
fiscal  bank  and  another  to  create  a  fiscal  agency,  in  his  annual 
message  suggested  a  plan  to  estabhsh  a  Board  of  Control  in 
place  of  a  Bank  of  the  United  States.  Following  this  sugges- 
tion. Secretary  Forward  submitted  to  Congress,  December  21, 
1841,  a  plan  for  the  creation  of  an  Exchequer  Board,  the 
designation  having  been  changed  from  a  Board  of  Control. 
The  Exchequer  Board  was  to  be  composed  of  the  Secre- 
tary of    the  Treasury  for    the    time   being,   the    treasurer 


of  the  United  States  for  the  time  being,  and  three  com- 
missioners to  be  appointed  by  the  President,  with  the  advice 
and  consent  of  the  Senate,  one  of  the  commissioners  to  be 
appointed  for  two  years,  one  for  four  years,  and  one  for  six 
years,  and  vacancies  subsequently  occurring,  to  be  filled 
at  the  end  of  every  period  of  two  years.  The  board  was 
authorized  and  directed  to  cause  to  be  prepared  and  issued 
treasury  notes  of  a  denomination  of  not  less  than  five  dollars 
or  more  than  one  thousand  dollars  which  were  to  circulate 
as  money.  These  notes  were  redeemable  in  gold  or  silver  on 
demand.  The  amount  of  the  notes  was  limited  to  fifteen 
millions  of  dollars  unless  otherwise  provided  by  law.  They 
were  made  receivable  for  all  dues  to  the  United  States  and  it 
was  provided  that  the  central  board  and  all  of  its  several  agen- 
cies should  keep  on  hand  at  all  times  a  gold  and  silver  reserve 
which  should  equal  one-third  of  the  amount  of  outstanding 
notes.  The  board  was  also  authorized  to  estabUsh  agencies  for 
the  transaction  of  its  business  in  different  parts  of  the  country, 
and  to  purchase  and  sell  domestic  bills  of  exchange  payable  in 
another  state  from  that  in  which  they  were  drawn.  The  pur- 
pose of  this  provision,  it  was  claimed,  was  to  facilitate  domestic 
exchanges  which  for  some  time  had  been  in  a  most  demoralized 
condition,  being  dependent  upon  state  banks  in  different 
parts  of  the  country,  most  of  whom  had  suspended  specie  pay- 
ments and  whose  notes  were  at  a  large  discount.  You  will 
notice  the  wonderful  resemblance  between  the  two  plans — the 
same  kind  of  a  board  with  the  same  power  over  the  currency, 
except  that  the  amount  of  the  notes  to  be  issued  was  hmited  to 
fifteen  milHons  of  dollars  in  the  Tyler  plan;  but,  with  the  same 
proportion  of  reserves,  the  redemption  however  to  be  in  gold 
and  silver  alone.  None  of  the  enormous  powers  granted  the 
Federal  Reserve  Board  to  loan  money  and  control  the  bank- 


40 

ing  system  of  the  country  are,  however,  to  be  found  in  the 
Tyler  plan.  This  plan  was  presented  to  Congress  at  the 
beginning  of  the  December  session  in  1841.  It  was  discussed 
at  some  length  in  both  houses  and  finally  referred  to  friendly 
committees  in  each  house.  The  terms  of  this  original  plan, 
the  character  of  the  men  who  discussed  its  provisions,  and 
the  final  disposition  of  the  measure,  all  have  the  strongest 
possible  interest  for  us  in  the  consideration  of  the  Democratic 
caucus  bill.  The  senators  who  took  the  leading  part  in  the 
discussion  in  the  Senate  were  James  Buchanan,  Thomas  H. 
Benton,  John  C.  Calhoun,  Levi  Woodbury  and  Robert  J. 
Walker,  men  whose  right  to  speak  for  their  party  and  its 
policies  was  not  then  doubted  and  can  not  now  be  called  in 
question  by  the  friends  of  the  enlarged  Tyler  plan  which  we 
are  now  considering.  It  was  apparent  upon  the  presentation 
of  President  Tyler's  plan  that  it  had  few  friends  or  even 
apologists  in  either  house.  The  principal  discussion  occurred 
before  the  reference  of  the  bill  to  the  committees. 

In  the  Senate,  Senators  Buchanan  and  Benton  led  the 
opposition  to  the  measure.  I  feel  justified  in  quoting  from  the 
debate  at  length  on  account  of  its  illuminating  qualities. 
Senator  Buchanan,  in  his  speech  of  December  29,  1841,  as 
reported  in  the  Congressional  Globe,  said  that  ''he  had  viewed 
the  plan  submitted  by  the  Secretary  in  every  aspect  and  he 
could  see  nothing  in  it  but  a  great  government  bank.  They 
(the  Exchequer  Board),  were  to  put  in  circulation  a  government 
paper  currency  not  exceeding  $15,000,000  in  notes  of  a  de- 
nomination not  lower  than  five  nor  higher  than  one  thousand 
dollars  and  they  were  expressly  authorized,  according  to  the 
rules  of  banking,  to  issue  three  paper  dollars  for  every  gold  and 
silver  dollar  in  their  possession.  ~  'Hften  it  was  a  bank  of  issue. 
Was  it  also  a  bank  of  discount?    Could  any  man  doubt  it? 


41 

******  Mr.  Buchanan  therefore  took  it  for  granted 
that  it  could  not  and  would  not  be  denied  that  this  Exchequer 
Board  was  a  bank.  ******  jJqw  could  it  possibly 
be  supposed  that  any  honorable  senator  belonging  to  the  party 
with  which  it  was  Mr.  Buchanan's  happiness  to  act  could  ever 
adopt  a  plan  of  this  description.  ******  WTiat 
would  the  President  become,  according  to  this  plan?  He  was 
already  the  great  fountain  of  poUtical  patronage;  and  he  was  to 
become  the  head  of  an  immense  moneyed  institution.  Pro- 
testing always  that  no  remarks  he  should  now  make  had  the 
remotest  application  to  President  Tyler,  he  put  the  case  of  an 
ambitious  and  dangerous  man  being  at  the  head  of  the  Govern- 
ment— an  Aaron  Burr  being  in  the  chair — and  let  him  have  it 
in  his  power  to  control  the  whole  of  the  pubhc  revenue;  let  him 
have  at  his  disposal  all  the  money  of  the  people,  with  which  to 
purchase  the  services  of  political  partisans  on  the  eve  of  a  great 
presidential  election,  and  what  would  become  of  the  national 
liberty.  All  they  had  formerly  heard  about  a  union  of  the 
purse  and  the  sword  was  mere  idle  declamation;  but  here  was 
that  union  in  reality,  and  without  a  veil.  All  the  money  of  the 
people  was  to  be  subjected  to  the  executive  disposal,  and  the 
President  was  to  become  at  once  the  fountain  of  individual 
wealth  as  well  as  of  political  power.  The  treasury  bank  was 
to  be  completely  and  exclusively  under  the  control  of  the 
government;  and  an  able,  who  should  be  at  the  same  time  a 
bad  man,  would  be  in  circumstances,  by  the  use  of  this  double 
power,  both  pohtical  and  fiscal,  to  spread  unbounded  corrup- 
tion throughout  the  community,  to  subsidize  the  venal  to  the 
purposes  of  his  ambition,  and  so  to  corrupt  and  to  impair  the 
liberties  of  his  country,  that  they  would  be  no  longer  worth 
preserving.     ****** 


42 

''  These  exchequer  notes  constituted  in  every  respect  a  Govern- 
ment paper  money,  and  what  had  the  past  history  of  the  world 
invariably  demonstrated  to  be  the  fate  of  such  money?  Was 
there  one  country  under  the  sun  which  ever  had  tried  it  and 
had  not  been  a  sufferer  from  the  experiment?  Everywhere  its 
value  had  depreciated  from  day  to  day,  until  at  length  it  had 
sunk  to  nothing.  The  two  most  striking  examples  of  this  were 
to  be  seen  in  the  assignats  issued  during  the  French  revolution, 
and  the  continental  money  of  our  own  Revolutionary  days.  In 
both  cases,  indeed,  the  paper  accomplished  a  glorious  purpose — 
it  established  and  sustained  public  liberty,  and  enabled  each 
of  these  nations  to  resist  and  overcome  a  despotic  power;  but 
as  a  currency,  as  money,  it  sank  and  sank  until  at  length  it 
lost  all  value.  And  should  we,  in  these  piping  times  of  peace, 
when  the  people  were  abundantly  able  to  pay  all  the  expenses 
of  Government,  resort  to  an  expedient  suited  only  to  the  most 
desperate  emergency,  and  of  so  tempting  and  seducing  a 
character  as  to  have  been  abused  by  every  Government  that 
had  resorted  to  it?^'* 

The  part  which  Mr.  Benton  took  in  the  discussion  was  even 
more  important  and  significant.     He  said : 

''In  his  (Hamilton's)  report  on  a  national  bank  in  1791,  he 
ran  a  parallel  between  the  dangers  of  bank  paper  and  govern- 
ment paper,  assigning  to  the  latter  the  character  of  far  greatest 
danger  and  mischief — an  opinion  in  which  I  fully  concur  with 
him."t 

After  quoting  the  report,  he  says: 

''I  can  add  nothing  to  the  force  of  these  sentiments  by  adding 
my  own  concurrence  in  them.     I  fully  concur  in  the  sentiment 

♦Congressional  Globe,  27th  Cong.,  2dses3.,  app.,  pp.  43-4. 
tCongreasional  Globe,  27th  Cong.,  2d  seas.,  app.,  p.  65. 


that  government  issues  of  paper  are  far  more  dangerous  than 
bank  issues — as  much  more  so  as  the  power  and  sphere  of  action 
of  a  government  is  greater  than  the  power  and  sphere  of  action 
of  a  bank.     ****** 

^'  The  point  of  difference  between  them  is  a  government  bank 
and  government  paper  on  one  hand,  and  a  banking  company 
under  a  national  charter,  issuing  bank  notes,  oh  the  other. 
This  is  the  point  of  difference,  and  it  is  a  large  one,  very  visible 
to  my  eye;  and  I  am  free  to  say  that,  with  all  my  objections 
to  the  national  bank  and  its  paper,  I  am  far  more  opposed  to 
government  banking,  and  to  government  issues  of  paper 
money."* 

And  again: 

"A  great  number  of  our  American  people  ****** 
have  become  possessed  of  a  fixed  idea  that  paper  money  is  the 
summum  honum  of  human  life.  Possessed  of  this  idea  they 
direct  all  their  thoughts  to  the  erection  of  a  national  institu- 
tion— no  matter  what — to  strike  paper  money,  and  circulate 
it  upon  the  faith  of  the  credit  and  revenues  of  the  union.  No 
argument,  no  reason,  no  experience  of  our  own,  can  have  the 
least  effect  in  dislodging  that  fixed  and  sovereign  conception. 
To  this  we  are  indebted  for  the  cabinet  plan  of  the  federal 
exchequer  and  its  appurtenances,  which  has  been  sent  down 
to  us."t 

Senator  Calhoun,  in  the  course  of  his  speech,  said: 

^*  There  were  many  and  decisive  objections  to  the  scheme 
proposed.  They  had  been  clearly  and  strongly  pointed  out 
by  the  senator  from  Pennsylvania  (Mr.  Buchanan) .  He  agreed 
with  him  that  it  would  be  a  government  bank,  not  only  in 

♦Congressional  Globe,  27th  Cong.,  2d  sess.,  app.  p.  66. 
tT.  H.  Benton,  Thirty  Years  View,  p.  392. 


44 

effect,  but  in  reality.  ******  jj^  ^^so  concurred 
with  the  senator  that  it  would,  at  no  long  interval,  become  a 
mere  machine  for  issuing  irredeemable  paper.  The  report, 
itself,  among  its  admissions,  states  that  there  is  an  almost 
irrepressible  tendency  on  the  part  of  banks  to  excess  in  their 
operations.  It  is  true,  but  not  the  less  so,  that  there  is  the 
same  tendency  in  all  paper  circulations;  and,  if  possible,  stronger 
in  most  of  its  forms  than  that  of  the  banks  themselves.''* 

Senator  Woodbury  said  in  debate: — 

*' When  what  is  called  money  rests  for  its  character  on  naked 
legislation  or  inadequate  means  in  specie  to  redeem  every 
dollar  of  the  paper  due,  affairs  might,  to  be  sure,  go  on  con- 
fidingly while  no  deficiencies  were  threatened,  no  extravagant 
expenses  incurred,  or  no  great  fallings  off  in  resources  appre- 
hended. ******  Let  a  scheme  like  this  be  tested 
by  such  panics  and  over  trading  as  have  characterized  the  few 
years  past — and  the  whole  would  explode  in  a  single  month. 

All  the  evils  of  old  Continental  money  and  French  assignats, 
and  all  the  ravages  inflicted  by  colonial  paper,  before  the 
Revolution,  would  be  probable,  if  not  inevitable.  *  *  *  * 
In  such  a  panic  as  that  in  1834,  or  1837,  or  1840, — and  many 
more  which  might  be  named,  contrary  to  the  views  in  the 
report,  that  they  are  only  few  and  far  between — and  the  Fiscal 
Agency  would  be  broken  in  single  day."t 

More  important  even  than  the  discussion  in  the  Senate  were 
the  expressions  of  Andrew  Jackson  with  reference  to  this 
Tyler  plan  for  an  Exchequer  Board.  In  his  message  proposing 
the  plan,  President  Tyler  had  claimed  that  the  plan  he  pro- 
posed was  similar  to  that  which  had  been  advocated  by  Presi- 
dent Jackson,  and  Senator  Rives  of  Virginia  had  made  a  similar 
claim  in  the  Senate.     These  claims  having  been  brought  to  the 

♦Congressional  Globe,  27th  Cong.,  2d  sess.,  p.  70, 
tCongressional  Globe,  27th  Cong.,  2d  sess.,  app.,  pp.  55-6. 


45 

attention  of  Jackson,  he  wrote  two  letters  to  William  B.  Lewis, 
his  intimate  friend  and  the  man  who  had  been  the  chief  of  his 
kitchen  cabinet.     In  the  first  of  these,  he  said: 

^^I  informed  you  in  my  last,  that  I  regretted  that  part  of 
the  President's  message  that  recommended  a  paper  currency 
of  treasury  notes,  and  as  the  President  has  observed  that  it  was 
shadowed  forth  by  my  message  of  1830,  I  sincerely  regret  that 
he  did  not  fully  embrace  the  propositions  therein  set  forth. 
Turn  to  it  and  you  will  find  that  there  is  no  expression  there 
that  will  justify  the  idea  of  Congress  making  a  paper  currency 
of  any  kind,  much  less  by  issue  of  treasury  notes — and  it  is 
impossible  to  make  out  of  any  paper  system,  a  sound  cir- 
culating and  uniform  currency."* 

In  the  second  letter  written  two  weeks  later,  he  said : — 
^'I  discover  that  Mr.  Rives  has  adverted  to  my  message  of 
1830  in  support  of  the  measures  recommended.  I  regretted 
to  see  this — it  shows  him  uncandid,  because  there  is  no  likeness 
between  them.  ******  jyjy  explanatory  remarks 
show  this.  ******  The  word  bank  was  used  by 
me  in  its  proper  sense  to  distinguish  it  from  an  incorporated 
bank — a  place  where  the  money  of  the  government  was  to  be  kept, 
to  clearly  show  that  it  was  to  have  no  stockholders,  no  power  to 
issue  paper,  discount  or  exchange  and  if  Mr.  Rives  will  read  all 
my  messages  and  my  farewell  address  which  was  intended  to 
give  my  full  views  on  banking  he  will  find  he  has  done  me  great 
injustice  in  referring  to  my  messages,  as  authority  for  the 
fiscal  plan  proposed  by  President  Tyler.  Every  one  who 
knows  me,  must  be  aware  of  my  universal  hostiUty  against 
all  government  paper  currency.  The  old  continental  currency 
was  sufficient  to  convince  me  that  a  greater  curse  could  not 
visit  a  nation  than  a  paper  currency."* 

*W.  G.  Sumner,  Andrew  Jackson,  pp.  286-7. 


46 

After  these  discussions,  the  bill  was  referred  to  committees 
as  I  have  already  stated.  In  the  house  report,  the  committee 
of  which  Caleb  Gushing  was  chairman  recommended  a  change 
requiring  gold  and  silver  to  be  held  equal  to  the  amount  of  notes 
issued,  making  them  substantially  coin  certificates.  They 
held  that  it  was  no  part  of  the  business  of  the  federal  govern- 
ment to  carry  on,  directly  or  indirectly,  a  business  of  dis- 
counting notes  or  bills  or  otherwise  lending  money,  or  to  furnish 
funds  to  be  so  lent.  The  committee  of  the  Senate  recom- 
mended changing  the  formation  of  the  board  by  leaving  out  the 
ex-offiaio  members.  They  also  provided  that  the  amount 
of  note  issue  should  never  exceed  the  actual  amount  of  specie 
on  hand,  dollar  for  dollar,  stating  that  the  committee  were 
of  the  opinion  that  no  paper  should  issue  on  the  credit  of 
the  government  to  circulate  as  money,  and  that  such  issue 
would  be  in  violation  of  a  great,  fundamental  principle.  Even 
in  the  modified  form  proposed,  the  bill  found  no  substantial 
support  in  either  house  and  the  Tyler  plan  went  down  into 
oblivion  with  the  unanimous  disapproval  of  the  men  of  all  par- 
ties, only  to  be  restored  three  quarters  of  a  century  later  as  a 
Democratic  party  measure.  Every  criticism  made  by  the  great 
leaders  of  the  Democratic  party  in  1841  of  the  Tyler  plan 
would  apply  with  even  greater  force  to  the  plan  of  the  bill  we 
are  considering.  It  seems  somewhat  singular  that  a  Democratic 
administration  should  have  selected  the  plan  of  John  Tyler  for 
the  creation  of  an  Exchequer  Board  as  a  model  for  their  plan 
of  a  Federal  Reserve  Board. 

FEDERAL  RESERVE  BOARD  A  GOVERNMENT  CENTRAL  BANK. 

I  have  stated  that  by  the  establishment  of  the  Federal 
Reserve  Board  Congress  would  create  a  government  central 
bank.     The  board  is  a  bank  of  issue,  as  all  the  government 


47 

notes  authorized  by  the  bill  are  issued  by  it.  It  is  a  bank  of 
discount  as  it  makes  loans  of  government  notes  to  Federal 
Reserve  Banks,  taking  commercial  paper  as  collateral  at  a  rate 
of  discount  fixed  by  the  board.  The  following  recital  in  out- 
line of  the  powers  granted  and  functions  assigned  by  the  bill 
to  the  Federal  Reserve  Board  fixes  its  character  as  a  central 
bank.  The  imperial  powers  improvidently  granted,  and  the 
authority  given  the  Federal  Reserve  Board  over  reserve  banks 
and  their  members,  are  vastly  greater  than  those  exercised  by 
any  central  bank  in  existence.  The  reserve  banks  and  their 
offices  scattered  throughout  the  country  are  for  most  purposes 
merely  branches  of  the  central  board.  This  board  is  described 
by  the  committee  which  reported  the  bill  in  the  House  as  a 
^^  general  board  of  management  intrusted  with  the  power  to 
overlook  and  direct  the  general  functions  of  the  banks  referred 
to." 

The  Federal  Reserve  Board  has  authority  to  create  and 
readjust  districts  within  which  federal  reserve  banks  are  to  be 
located.  It  may  permit  state  banks  to  become  members,  and 
may  also  suspend  such  banks  from  membership  at  its  dis- 
cretion. It  may  establish  branches  of  the  federal  reserve 
banks  within  each  federal  reserve  district  and  prescribe  their 
management.  There  might  possibly  be  200  of  such  branches  in 
the  United  States  on  this  basis.  The  board  fixes  the  compen- 
sation of  all  the  directors  of  the  federal  reserve  banks.  Of  the 
nine  directors  of  the  reserve  banks  six,  three  representing  the 
shareholding  banks  and  three  representing  the  conamercial  and 
other  interests  of  the  district,  are  elected  by  the  member  banks 
acting  in  groups  which  are  estabUshed  by  the  agent  of  the 
Federal  Reserve  Board,  and  the  elections  are  held  under  the 
supervision  of  the  same  agent  who,  by  various  provisions,  be- 
comes an  important,  if  not  a  controUing  factor  in  all  elections. 


48 

The  central  board  appoints  three  of  the  nine  directors,  and  it 
has  the  power  to  remove  three  others,  if  in  its  opinion  they  are 
not  proper  representatives  of  the  commercial  interests  of  the 
districts.     The  central  board  appoints  the  chairman  of  the 
board  of  directors  of  each  reserve  bank,  who  is  evidently  in- 
tended to  be  the  manager  of  the  bank,  and  who  is  also  the  agent 
of  the  central  board  for  the  transaction  of  its  business.     He 
reports  all  acts  to  the  central  board,  which  fixes  his  salary  and 
can  remove  him  at  any  time  without  notice  and  appoint 
another  in  his  place.     The  directors  of  the  bank  have  no  con- 
trol over  him  or  his  acts.     The  central  board  has  an  office  in 
the  reserve  bank  in  charge  of  its  agent,  the  chairman  of  the 
board.     These  provisions  taken  together  give  the  central  board 
a  potential  voice  in  the  management  of  the  reserve  banks. 
The  central  board  has  the  right,  subject  to  an  exception,  to 
determine  or  define  the  character  of  paper  eligible  for  discount 
by  the  federal  reserve  banks;  to  fix  the  conditions  under  which 
member  banks  may  discount  120-day  paper;    to  review  and 
determine  the  rate  of  discount  which  can  be  charged  by  federal 
reserve  banks;   to  require,  or,  on  application,  to  permit  any 
federal  reserve  bank  to  rediscount  paper  of  any  other  federal 
reserve  bank.     With  reference  to  reserves,  the  power  of  the 
central  board  over  the  reserves  of  the  federal  reserve  banks  and 
of  all  national  banks  is  plenary.     It  is  authorized  to  suspend 
any  and  every  provision  of  law  with  reference  to  the  reserves 
of  reserve  banks  or  national  banks,  except  that  having  reference 
to  note  issue.     It  has  the  power  to  add  to  the  number  of  cities 
classified  as  central  reserve  cities,  to  reclassify  central  reserve 
or  reserve  cities,  and  to  designate  any  of  the  banks  therein  as 
country  banks,  at  its  discretion.     The  central  board  is  author- 
ized to  issue,  without  any  limitation  as  to  the  amount,  obliga- 
tions of  the  United  States  and  to  loan  these  on  collateral  to  the 


reserve  banks.  The  agent  of  the  central  board,  who  is  also 
chairman  of  the  board  of  the  reserve  bank,  acts  in  the  double 
capacity  of  applicant  for  loans  and  custodian  of  the  collateral 
offered  as  security  for  the  loan  of  government  notes  which  may 
be  made  at  any  time,  and  has  charge  also  of  changes  in  collateral. 
The  central  board  may,  at  its  discretion,  require  a  deposit  by  the 
federal  reserve  banks  of  a  redemption  fund  of  five  per  cent  of 
the  notes  issued,  and  it  can  fix  the  rate  of  discount,  not  however 
less  than  one-half  of  one  per  cent  per  annum  for  the  loans  of 
government  notes  to  the  reserve  banks. 

It  may,  at  its  discretion,  suspend  the  operations  of  any  federal 
reserve  bank  and  appoint  a  receiver  therefor.  The  routine 
business  of  the  federal  reserve  banks  is  also  under  the  control  of 
the  central  board.  It  may  make  regulations  governing  the 
transfer  of  funds  between  the  federal  reserve  banks.  The  cen- 
tral board  may  itself  act  as  a  clearing  house  for  federal  reserve 
banks  or  may  require,  at  its  discretion,  the  federal  reserve  banks 
to  act  as  clearing  houses  for  shareholding  banks.  It  may 
remove  officials  of  the  banks  for  incompetency;  it  may  require 
the  writing  off  of  doubtful  or  worthless  assets  upon  the  books 
of  the  reserve  banks;  it  may  levy  semi-annual  assessments  upon 
the  reserve  banks  for  the  expenses  of  the  central  board. 

The  central  board  is  given  the  power  to  exempt  national 
banks  from  those  provisions  of  law  which  restrict  the  character 
of  their  investments,  and  may  reduce  the  number  of  cities 
within  which  national  banks  are  permitted  to  make  loans  upon 
real  estate.  It  is  given  not  only  the  power  to  regulate  the 
savings  departments  of  national  banks,  but  it  can  fix  the  char- 
acter of  their  investments,  which  may  differ  in  different  parts 
of  the  country.  The  central  board  may  fix  the  terms  upon  which 
national  banks  may  apply  for  authority  to  estabUsh  branches 
in  foreign  countries,  and  it  may  reject  any  application  on  the 


50 

ground  that  its  approval  would  be  inexpedient.  By  an  unusual 
provision,  the  central  board  is  authorized  to  perform  all  the 
duties,  functions  and  services  implied  by  the  act  in  addition 
to  those  that  are  specified.  How  extensive  this  grant  of  power 
may  be,  it  is  impossible  to  say.  By  another  provision,  extra- 
ordinary in  its  character,  the  central  board  is  authorized  to 
levy  taxes  on  all  banks,  national,  state,  or  reserve,  whenever 
their  reserves  fall  below  a  point  to  be  fixed  by  the  board. 
There  is  no  limit  fixed  for  the  amount  of  the  levy  and  no  rule 
laid  down  which  is  to  be  followed  in  making  the  assessment. 
It  will  not  be  possible  for  me  in  the  time  I  have  at  my  disposal 
to  take  up  and  examine  in  detail  this  long  Ust  of  powers 
granted  to  the  central  board.  It  must  be  evident  that  it  con- 
tains more  than  one  grant  of  legislative  power  which,  upon 
principles  heretofore  declared  by  the  courts,  would  be  pro- 
nounced unconstitutional. 

By  the  different  provisions  of  the  bill  with  reference  to  re- 
serves it  might  happen  that  one  bank  in  the  city  of  New  York 
or  any  other  reserve  city  would  be  required  to  have  18% 
reserve,  another  one  12%  and  another  one  no  reserve  at 
all.  The  mere  existence  of  this  power  of  discrimination 
might,  in  itself,  have  a  very  persuasive  influence,  political  or 
otherwise,  upon  the  attitude  of  all  the  banks  towards  an 
administration  which  could  dispense  favors  and  impose  penal- 
ties of  this  nature. 

The  Federal  Board  is  given  the  power  to  determine  each 
week,  or  as  much  oftener  as  required,  the  rate  of  discount  to  be 
charged  by  each  reserve  bank  for  each  class  of  paper.  This 
provision  contemplates  different  rates  for  different  sections  of 
the  country  and  different  rates  on  different  classes  of  paper. 
In  other  words,  the  board  sitting  in  Washington  will  be  called 
upon  to  review  and  determine  at  least  once  a  week,  48  rates  of 


51 

discount  covering  the  entire  country,  and  to  fix  these  rates — 
in  the  language  of  the  bill — ^'in  view  of  accommodating  the 
commerce  of  the  country." 

The  fixing  of  this  miscellaneous  collection  of  rates  could  not 
possibly  be  made  effective  for  'any  of  the  purposes  for  which 
bank  rates  are  fixed  and  changed  in  other  commercial  countries. 
There  can  be  no  justification  for  fixing  a  different  rate  of  dis- 
count to  be  charged  by  a  government  institution,  supposedly 
created  in  the  public  interest,  on  the  same  class  of  paper  in  one 
section  of  the  country  as  distinguished  from  another.  The 
bill  evidently  contemplates  a  higher  discount  rate  in  the  South 
and  West  than  in  eastern  or  central  localities.  In  other  words, 
the  rate  might  be  4%  in  New  York  and  6  or  8%  in  Nebraska 
or  Texas. 

It  should  be  borne  in  mind  that  we  are  dealing  with  oflicial 
rates  and  not  commercial  rates,  which  are  controlled  more  or 
less  by  local  conditions.  Any  substantial  difference  in  rates 
fixed  for  federal  reserve  banks  would  send  standard  commercial 
paper  from  one  district  to  another  by  direct  or  indirect  means, 
to  secure  the  benefit  of  the  lower  rates.  In  my  opinion  it  is 
of  the  very  highest  importance  to  the  people  of  the  South  and 
West  that  there  should  be  a  uniformity  of  rates  in  all  the  reserve 
banks  for  identical  classes  of  paper.  Any  other  course  would 
result  in  an  unjust  discrimination  by  the  national  authority 
between  sections.  Uniformity  of  rates  is  most  important  from 
the  standpoint  of  the  desirabiUty  of  securing  approximate  equal- 
ity of  rates  and  facilities  to  every  section  of  the  country.  There 
is  no  use  in  establishing  standards  for  commercial  paper  if 
paper  representing  the  products  of  the  South  and  West  is  to 
be  discriminated  against  by  a  government  agency  in  contrast 
with  paper  representing  the  products  or  industries  of  the  East. 
One  of  the  principal  purposes  for  which  this  government 


52 

machinery  is  to  be  erected  is  to  give  the  paper  representing  the 
products  and  industries  of  the  country  a  new  and  better  status 
in  our  own  markets  and  those  of  the  world.  Can  this  be  accom- 
pUshed  if  we  declare  that  the  securities  of  great  sections  of  our 
common  country  are  not  entitled  to  the  credit  which  is  accorded 
to  those  of  other  sections  in  government  banks. 

One  of  the  main  purposes  of  creating  the  federal  reserve  banks 
is  to  secure  such  a  concentration  of  reserves  as  will  permit  their 
prompt  use  in  any  amount  and  in  any  part  of  the  country  to 
establish  confidence  and  avoid  panics.  I  think  it  must  be 
evident  to  anyone  familiar  with  conditions  that  the  creation  of 
these  twelve  or  more  federal  reserve  banks  would  not  accom- 
plish this  purpose. 

The  Federal  Reserve  Board,  an  organization  without  capital 
or  financial  responsibility,  has  no  reserves  of  its  own  and  is 
given  no  control  over  the  reserves  of  the  reserve  banks.  It 
has  power  to  increase,  at  its  discretion,  the  demand  obligations 
of  the  United  States,  but  it  has  no  power,  in  times  of  stress,  to 
keep  the  banks  or  the  Treasury  on  a  gold  basis,  or  to  prevent 
suspension  of  domestic  or  international  exchanges.  It  is 
given,  improvidently,  autocratic  powers  over  business  of  the 
banks — which  can  only  be  successfully  managed  by  the  men 
who  own  and  control  existing  institutions  and  who  are  familiar 
with  all  local  conditions.  It  is  granted  powers  that  can  only 
be  properly  exercised  by  trained  bankers,  and  it  can  take  no 
effective  action  for  reUef  in  times  of  national  or  international 
crises.  In  great  emergencies  when  some  sustaining  power  is 
necessary,  it  will  be  powerless.  It  can  take  no  steps  in  the 
interest  of  the  country  at  large  to  control  the  movement  of 
gold  or  to  increase  the  supply  of  gold  through  negotiations  with 
the  great  banks  of  Europe  or  otherwise.  It  might  be  able  to 
control  elections  and  insure  the  success  of  a  political  party, 


53 

but,  in  times  of  stress,  it  would  have  no  power  to  preserve 
public  or  private  credit.  It  would  be  able  to  loan  government 
money  to  impecunious  banking  friends  or  to  deposit  govern- 
ment funds  in  ^^pet  banks,"  but  it  would  be  unable  to  assist  a 
bank  or  a  community  in  time  of  serious  trouble.  It  would  have 
no  status  in  the  commercial  world,  and  its  standing  at  home 
would  be  fixed  by  its  importance  as  a  poUtical  machine  rather 
than  as  a  force  in  financial  circles. 

Jackson's  government  bank. 

Friends  of  a  government  central  bank  quote  General  Jackson 
as  one  of  its  advocates.  It  is  true  that  he  suggested  on  several 
occasions  that  it  might  be  desirable  to  establish  a  government 
bank,  but  these  suggestions  were  always  more  or  less  vague  in 
character,  and  he  never  committed  himself  in  detail  to  any 
definite  plan.  His  opponents,  however,  claimed  that  General 
Jackson  intended,  by  these  indefinite  suggestions  to  advocate 
the  creation  of  a  government  central  bank  under  political  con- 
trol, and  that  the  effect  would  be  to  place  the  whole  banking 
power  of  the  country  at  the  mercy  of  the  president.  I  think  it 
may  be  said  that  this  claim  did  not  fairly  represent  General 
Jackson's  views  and  that  he  intended  merely  an  institution  like 
the  independent  treasury  that  should  take  over  government 
business  alone.  The  quotations  which  I  have  already  made  from 
his  letters  to  William  B.  Lewis  are  confirmed  in  this  respect  by 
his  statement  with  reference  to  the  removal  of  the  public 
deposits  as  follows: 

'^  It  is  the  desire  of  the  President  that  the  control  of  the  banks 
and  the  country  shall,  as  far  as  possible,  be  entirely  separated 
from  the  political  power  of  the  country  as  well  as  wrested  from 
an  institution  which  has  already  attempted  to  subject  the 
government  to  its  will.     In  his  opinion  the  action  of  the 


54 

general  government  on  this  subject  ought  not  to  extend  beyond 
the  grant  in  the  constitution,  which  only  authorizes  Congress 
'to  coin  money  and  regulate  the  value  thereof ;  all  else  belong 
to  the  states  and  the  people,  and  must  be  regulated  by  public 
opinion  and  the  interests  of  trade."* 

The  suggestion,  however,  led  to  a  prolonged  discussion  on  the 
merits  of  the  government  central  bank. 

The  objections  to  the  creation  of  a  government  central 
bank  were  never,  perhaps,  more  clearly  and  forcibly  stated  than 
in  the  report  of  the  House  committee  of  ways  and  means  of 
which  Mr.  McDuffie  of  South  Carolina  was  chairman,  in  1830. 
In  the  course  of  this  report,  the  following  statement  was 
made: 

''It  will  be  difficult  to  find  any  warrant,  either  in  the  letter 
or  the  spirit  of  the  constitution,  for  the  creation  of  this  tremen- 
dous engine  of  pecuniary  influence.  It  may,  indeed,  be 
doubted,  whether  all  the  branches  of  the  legislative  authority 
united  have  any  constitutional  power  to  lend  the  public  revenue 
either  to  individuals,  corporations,  or  states,  without  reference 
to  the  objects  to  which  it  shall  be  appUed.  But,  whatever  may 
be  the  power  of  Congress  on  this  subject,  it  appears  to  the 
committee  to  be  inexpedient,  in  every  view  of  the  question, 
that  the  government  should  be  converted  into  a  great  money 
lender.  There  is  no  species  of  trade  in  which  it  would  be  wise 
for  the  government  to  embark;  but  of  all  the  variety  of  pur- 
suits known  to  human  enterprise,  that  of  lending  money  by  the 
government  to  the  citizens  of  the  country,  would  be  fraught 
with  the  most  pernicious  consequences.     *     *     * 

''In  the  first  place,  it  is  a  business  to  which,  in  the  very 
nature  of  things,  no  government  is  adapted,  and,  least  of  all,  a 

*F.  N.  Thorpe,  Statesmanship  of  Andrew  Jackson,  p.  280. 


55 

popular  government.     There  is  no  employment  of  capital  that 
requires  a  more  vigilant  and  skilful  superintendence.     *     *    * 

"  Nothing  that  has  not  happened  can  be  more  certain,  than 
that  every  unfavorable  vicissitude  in  trade,  every  period  of 
commercial  distress  and  embarrassment,  would  give  rise  to 
importunate  and  clamorous  calls  for  indulgence,  and  for  an 
injudicious  extension  of  discounts,  which  no  administration 
would  have  the  firmness  to  resist.     *    *    * 

^'The  government  would  have  scarcely  any  faculty  of  re- 
sistance, when  appeals  for  indulgence  should  come  from  all 
quarters  of  the  Union,  sustained  by  the  strong  plea  of  public 
distress  and  embarrassment.     *     *     * 

^^  But  the  inevitable  tendency  of  a  government  bank  to 
involve  the  country  in  a  paper  system,  is  not,  in  the  opinion 
of  the  committee,  the  greatest  objection  to  it.  The  powerful, 
and,  in  the  hands  of  a  bad  administration,  the  irresistible  and 
corrupting  influence  which  it  would  exercise  over  the  elections 
of  the  country,  constitutes  an  objection  more  imposing  than  all 
others  united.  No  matter  by  what  means  an  administration 
might  get  into  power,  with  such  a  tremendous  engine  in  their 
hands  it  would  be  almost  impossible  to  displace  them,  without 
some  miraculous  interposition  of  Providence. 

*^  Deeply  impressed  with  the  conviction  that  the  weak  point 
of  free  government  is  the  absorbing  tendency  of  executive 
patronage,  and  sincerely  beUeving  that  the  proposed  bank 
would  invest  that  branch  of  the  government  with  a  weight  of 
moneyed  influence,  more  dangerous  in  its  character,  and  more 
powerful  in  its  operation,  than  the  entire  mass  of  its  present 
patronage,  the  committee  have  felt  that  they  were  imperiously 
called  upon,  by  the  highest  considerations  of  public  duty,  to 
express  the  views  they  have  presented,  with  a  frankness  and 
freedom  demanded  by  the  occasion."* 

*M.  St.  C.  Clarke  and  D.  A.  Hall,  Bank  of  the  U.  S.,  pp.  758-9. 


56 


NATIONAL  BANKS. 


It  is  sought  to  make  the  control  of  the  Federal  Reserve 
Board  over  the  banking  business  of  the  country  effective  by 
compelling  national  banks  to  subscribe  within  a  year  to  the 
stock  of  the  federal  reserve  banks  a  sum  equal  to  twenty  per  cent 
of  their  capital  under  penalty  of  dissolution  in  case  of  failure  or 
refusal.  The  national  banks  are  further  required  to  deposit 
with  the  reserve  banks  a  portion  of  their  reserves.  These 
drastic  provisions  disclose  an  amazing  want  of  confidence  on  the 
part  of  the  author  of  the  bill  in  the  wisdom  of  its  methods. 
The  banks  are  now  acting  under  charters  for  a  fixed  period 
under  certain  definite  conditions  which  have  been  faithfully 
lived  up  to  with  the  result  that  note  holders  have  suffered 
no  loss,  and  that  depositors  and  shareholders  have  lost  only 
infinitesimal  amounts.  The  United  States  is  bound  by  every 
equitable  consideration  to  protect  the  banks  from  serious  losses 
on  their  investments  in  government  bonds. 

I  submit  that  it  is  not  fair  to  impose  upon  these  insti- 
tutions as  the  price  of  their  continued  existence  new,  onerous, 
or  impossible  conditions  especially  in  legislation  enacted 
ostensibly  to  assist  them  the  better  to  discharge  their  duties  to 
the  public  in  times  of  trouble.  The  conditions  imposed  are 
of  such  a  character  that  unless  changed  they  cannot  be  ac- 
cepted by  the  smaller  banks  which  form  a  large  majority  of 
the  national  banks,  without  serious  losses  and  dangerous  im- 
pairment of  their  resources  and  their  ability  to  serve  the  pub- 
lic. It  will  be  noted  that  the  penalty  of  dissolution  goes  into 
effect  in  one  year,  even  if  it  has  not  been  possible  within  that 
time  to  organize  a  single  federal  reserve  bank  with  the  requisite 
capital.  It  would  seem  that  the  only  method  by  which  a 
national  bank  could  avoid  the  serious  consequences  of  this  legis- 


57 

lation  would  be  to  take  out  a  state  charter  and  transfer  its 
business  through  voluntary  liquidation. 

It  does  not  seem  possible  that  the  authors  of  this  bill  can 
have  considered  the  dreadful  consequences  that  would  ensue 
if  the  national  banking  system  is  broken  up  by  enforced  dis- 
solution or  liquidation.  The  national  banks  have  outstanding 
$742,000,000  of  circulating  notes  and  banks  going  out  of 
existence  must  deposit  lawful  money  in  the  treasury  for  their 
redemption.  These  banks  hold  $685,000,000  of  2%  bonds. 
A  state  bank  could  not  afford  to  hold  these  for  investment  and 
their  sale  would  mean  a  large  loss  to  the  owners,  and  the  credit 
of  the  United  States  would  suffer  unmeasured  injury.  It  is 
safe  to  say  that  the  serious  disarrangement  of  credits,  the 
contraction  of  circulating  medium,  and  the  destruction  of  con- 
fidence that  would  certainly  arise  from  a  transfer  of  any 
considerable  amount  of  the  banking  business  of  the  country 
from  the  national  to  the  state  system  would  end  in  a  financial 
panic  such  as  has  never  been  seen  in  any  country. 

RESERVES   OF   NATIONAL   BANKS. 

Under  the  provisions  of  the  national  banking  act  estabhshing 
the  character  and  amount  of  reserves  for  national  banks  a 
system  has  grown  up  which  in  the  main  is  satisfactory  to  both 
the  banks  and  the  pubhc.  It  has  been  found  ineffective  in 
times  of  crisis,  and  the  rigid  provisions  forbidding  discounts 
whenever  the  legal  hmit  of  reserves  is  reached  is  unsatisfactory 
in  operation,  but  there  has  been  no  popular  demand  for  a 
reduction  of  the  amount  of  reserves  required.  As  authorized 
by  law  country  banks  maintain  balances  with  reserve  agents 
in  local  centers  and  in  central  reserve  cities.  This  arrangement 
affects  favorably  the  convenience  and  the  revenues  of  banks  of 
all  classes.     Banks  are  obUged  to  maintain  balances  with  cor- 


58 

respondents  or  reserve  agents  for  exchange  and  collection  as 
well  as  reserve  purposes.  Banks  in  reserve  cities  have  been 
able  to  use  the  deposits  of  country  banks,  and  this  use  has 
assisted  in  the  development  of  important  business  centers  in 
various  parts  of  the  country. 

The  relations  between  country  banks  and  their  reserve  agents 
have  been  usually  of  an  intimate  character.  The  banks  which 
act  as  reserve  agents  are,  in  almost  every  case,  important 
institutions  of  large  capital  and  resources,  and  in  ordinary 
times  amply  able  to  respond  to  any  demands  for  the  reserves 
in  their  custody,  as  well  as  to  furnish  assistance  and  support 
to  their  country  correspondents  in  cash  or  credit  whenever 
required. 

The  country  banks  receive  a  revenue  from  their  deposits  with 
reserve  agents  and  can  invest  a  portion  of  their  capital  more 
profitably  than  in  the  capital  of  the  reserve  banks.  If  the  bill 
should  pass  in  the  form  proposed  it  would  take  away  from  the 
country  banks  an  important  part  of  their  revenue  by  the  re- 
quirement that  reserve  banks  shall  accept  checks  and  other 
collection  items  at  par.  But  these  results  are  unimportant  com- 
pared with  the  fact  that  their  deposits  in  reserve  banks  might 
not  be  available  even  in  the  ordinary  times  for  reserve  purposes, 
as  the  scheme  of  the  bill  contemplates  making  the  reserve  banks 
discounting  machines  which  may  be  kept  in  perpetual  operation 
to  their  full  capacity,  in  order  to  prevent  a  contraction  of  credits. 
The  framers  of  the  bill  evidently  not  only  intend  that  the 
reserve  banks  shall  make  loans  to  their  members  to  the  extent 
of  their  deposits,  but  it  is  suggested  that  they  may  loan  them 
the  money  to  pay  for  their  subscriptions  to  the  capital  of  the 
reserve  banks.  Banks  that  do  not  borrow  money  for  loaning 
purposes  would  find  that  their  reserve  had  disappeared  in 
loans  to  rival  institutions. 


59 

It  should  not  be  forgotten  that  the  United  States  has  a  first 
lien  upon  all  the  assets  of  the  reserve  banks  as  security  for 
government  deposits  and  for  issues  of  government  notes  which 
have  been  loaned  to  them.  In  cases  of  large  losses  by  the  banks 
this  preference  would  be  a  serious  matter  for  the  bank's 
creditors. 

The  change  from  the  old  system  to  the  new  involves  a  direct 
loss  to  the  country  banks  and  imperils  their  investments  and 
deposits.  National  banks  are  required  to  submit  to  the  losses 
and  inconvenience  I  have  referred  to. 

The  principal  advantage  which  national  banks  have  over 
state  banks  is  in  the  profit  they  derive  from  their  note  circulation 
and  the  fact  that  they  are  permitted  to  share  at  times  in  the 
benefits  of  government  deposits.  Both  of  these  advantages  are 
practically  removed  by  the  bill,  one  to  take  effect  immediately 
and  the  other  by  the  progressive  reduction  in  national  bank 
note  issues.  Country  banks  hold  a  much  larger  proportion  of 
their  capital  in  United  States  bonds  than  city  banks.  These 
bonds  have  been  bought  in  many  cases  within  the  last  ten  or 
twelve  years,  and  bought  with  the  belief  that  the  national  bank- 
ing system  was  to  be  permanent  and  that  they  were  not  likely 
to  be  deprived  of  their  charter  rights.  The  losses  on  their 
holdings  of  government  bonds,  unless  Congress  shall  take 
effective  means  for  their  relief,  will  be  a  serious  matter  to  these 
institutions.  59%  of  the  national  banks  have  less  than  $100,- 
000  capital;  91%  have  less  than  $250,000  capital.  Of  state 
banks  the  proportion  of  small  banks  to  the  total  number  is 
much  greater. 

We  should  not  lose  sight  of  the  fact  that  the  national  banks 
in  many  locaUties  have  not  been  able  to  compete  successfully 
for  business  with  the  state  banks.  In  1912  67%  of  the 
individual  deposits  of  the  country  was  in  state  institutions. 


60 

The  number  of  these  institutions  is  practically  three  times 
as  great  as  that  of  national  banks.  The  remarkable  growth 
of  state  banking  institutions  has  been  largely  owing  to  advan- 
tages growing  out  of  more  Uberal  reserve  requirements  and 
out  of  the  fact  that  they  have  been  able  under  state  laws 
to  transact  business  which  is  forbidden  to  national  banks. 

With  reference  to  state  reserve  requirements,  ten  states 
have  no  provisions  at  all  for  reserves.  In  almost  every  state 
the  provisions  are  more  hberal  than  the  national  requirements. 
In  all  states  national  bank  notes  can  be  counted  as  a  part  of 
the  reserves  of  state  banks,  and  in  some  states  the  reserves  may 
consist  in  part,  and  in  one  state  wholly,  in  securities.  The  laws 
of  all  the  states  leave  the  banks  almost  entirely  free  to  deposit 
their  funds  in  the  banks  of  the  great  commercial  centers.  In 
most  states  they  are  entitled  to  keep  a  larger  proportion  of 
their  reserves  in  the  hands  of  reserve  agents  than  is  permitted 
by  the  banking  act  or  the  proposed  bill. 

With  legislation  depriving  national  banks  of  the  advantages 
which  they  now  have  and  imposing  upon  them  new  and  onerous 
burdens,  and  with  the  state  institutions  retaining  all  the  advan- 
tages which  they  now  have,  it  is  not  unreasonable  to  expect  the 
decUne  if  not  the  extinction  of  the  national  system. 

It  is  impossible  to  predict  the  effect  which  the  radical  reduc- 
tion in  the  amount  and  change  in  the  custody  of  the  reserves  of 
national  banks  will  have  upon  the  business  of  the  country.  It 
is  certain  that  the  effect  at  first  will  be  to  create  confusion  and 
uncertainty,  and  that  the  readjustment  of  credits  and  with- 
drawals of  deposits  will  lead  to  credit  contraction.  Just  what 
amount  of  credit  expansion  will  take  place  later  owing  to  re- 
duction of  reserves  depends  upon  whether  the  national  banks 
accept  the  legal  limit  of  cash  reserves  fixed  by  the  bill  as  a 
basis  for  their  future  credit  operations.     One  of  the  witnesses 


61 

who  appeared  before  the  Senate  committee  estimated  that  the 
national  banks  hold  12.75%  of  their  net  deposits  in  cash.  He 
estimated  that  under  the  House  bill  a  cash  reserve  of  6.8%  will 
be  required.  If  the  national  banks  should  continue,  notwith- 
standing the  provisions  of  law,  to  maintain  a  cash  reserve  of 
12.75%  against  their  Habihties,  the  result  of  the  changes 
proposed  by  the  bill  would  be  a  contraction  of  credits.  If  on 
the  other  hand  the  credit  business  of  the  national  banks  is  to 
be  conducted  hereafter  on  a  6.8%  cash  basis,  this,  taken  in 
connection  with  an  expansion  of  note  issues,  would  certainly- 
lead  to  indefinite  and  destructive  inflation. 

One  of  the  purposes  of  the  proposed  legislation,  as  stated  by- 
its  friends  is  to  take  from  the  bankers  the  control  of  the  bank- 
ing and  monetary  interests  of  the  country  and  to  place  it  in  the 
hands  of  a  Federal  Reserve  Board,  and  to  prevent  the  concen- 
tration of  money  in  New  York  and  other  great  financial  centers 
by  the  creation  of  twelve  federal  reserve  banks.  The  reserve 
banks  are  to  take  over  and  hold  reserves  now  held  by  the  banks 
in  reserve  and  central  reserve  cities,  with  a  view  of  weakening, 
if  not  of  destroying,  the  supremacy  of  the  money  power,  or  of 
the  money  trust,  as  it  is  sometimes  described  by  political  re- 
formers. To  aid  in  the  accomplishment  of  this  purpose,  the 
new  system  of  reserves  as  well  as  of  reserve  banks  is  proposed. 
Keeping  these  purposes  in  mind,  it  is  desirable  to  examine 
somewhat  in  detail  the  methods  proposed  for  their  accom- 
pHshment.  The  cash  reserve  of  the  banks  in  the  central  reserve 
cities  is  reduced  from  twenty-five  to  nine  per  cent.  The 
change  in  the  custody  of  the  reserves  is  more  apparent  than 
real. 

59%  of  the  national  banking  capital  of  the  country  is 
located  in  thirteen  states,  classified  in  the  comptroller's  report 
as  eastern  and  middle  western  states,  while  the  other  thirty- 


62 

six  have  41%  of  the  capital.  The  thirteen  states  have  67% 
of  the  banking  resources  of  the  country,  while  the  other 
thirty-six  have  33%  of  these  resources.  The  capital  of  the 
federal  reserve  banks  is  fixed  by  a  percentage  of  the  capital- 
ization of  the  national  banks.  It  follows  that  59%  of  the 
capital  of  these  banks  will  be  located  in  the  thirteen  states. 
The  deposit  of  the  reserve  in  these  thirteen  states,  outside  of 
government  deposits,  will  be  67%  of  those  of  the  country. 
If  we  assume  that  the  central  board  will  not  exercise  the 
powers  of  control  over  the  management  of  the  reserve  banks 
and  that  the  banks  in  these  states  will  have  the  potential  voice 
in  the  management  of  the  reserve  banks  in  their  section  that 
some  of  the  friends  of  the  measure  claim,  the  supremacy  of  the 
money  power  of  the  East  will  be  strengthened  rather  than  weak- 
ened by  the  House  bill.  A  portion  of  the  capital  and  resources 
of  the  section  are  transferred  from  one  class  of  organization  to 
another  without  change  of  ownership.  A  new  machine  to  be 
operated  by  the  same  men  is  set  up  with  government  approval. 
The  banks  in  different  sections  are  not  controlled  by  conflicting 
interests,  but  if  they  were,  this  legislation  would  only  emphasize 
existing  conditions. 

If  four  reserve  banks  should  be  located  in  these  thirteen  states 
they  would,  on  the  basis  that  all  national  banks  assented,  have 
a  capital  of  about  fifteen  millions  each.  The  eight  located  in 
the  remaining  thirty-six  states  would  have  a  capital  of  about 
five  milUons  each.  The  reserve  bank  in  New  York  would  have 
a  larger  capital  and  much  greater  resources  than  the  three  that 
might  be  located  in  the  thirteen  southern  states. 

It  is  true  that  a  very  large  amount  will  be  withdrawn,  by  the 
operations  of  the  bill,  from  the  banks  in  the  reserve  and  cen- 
tral reserve  cities,  but  at  least  two-thirds  of  this  amount  will 
be  redeposited  in  the  reserve  banks  in  the  thirteen  eastern  and 


63 

middle  western  states.  If  we  assume  that  these  reserve  banks 
are  simply  adjuncts  of  existing  institutions,  this  process  will 
largely  consist  of  taking  money  out  of  one  pocket  and  putting 
it  into  another. 

The  treatment  of  bank  reserves  in  the  central  reserve  cities  is 
interesting.  They  now  hold  cash  reserves  amounting  to  407 
million  dollars,  this  being  25%  of  their  net  deposits,  and  this 
must  be  held  in  their  vaults  and  cannot  be  used  for  any  other 
purpose.  By  the  terms  of  the  bill  they  would  be  required 
to  hold  only  146  millions  in  cash  and  261  millions  would 
be  released  for  other  purposes;  but  146  milhons  might  be 
deposited  in  a  reserve  bank  where  it  would  form  a  basis  for 
discount,  leaving  115  millions  available  as  a  basis  for  credit 
expansion.  If  cash  reserves  are  accepted  as  the  basis  for 
credit  expansion,  the  banks  in  the  central  reserve  cities  will 
be  able  to  increase  their  loans  in  the  proportion  of  9  to  25 
under  the  new  law  as  compared  with  the  old.  If  the  bankers 
of  New  York  and  other  central  reserve  cities  should  consult 
their  selfish  interest  they  would  be  found  earnest  advocates 
of  the  new  plan. 

It  was  undoubtedly  intended  that  the  reserves  concentrated 
in  the  reserve  banks  should  be  made  available  for  the  assistance 
and  support  of  any  bank  or  banks  in  time  of  serious  trouble. 
Heretofore,  scattered  reserves  have  been  found  useless  and 
panics  precipitated  by  a  general  scramble  of  banks  throughout 
the  country  to  increase  their  cash  reserves.  The  trouble, 
I  am  sure,  would  be  intensified  rather  than  relieved  by  the 
creation  of  this  new  class  of  banks.  In  addition  to  29,000 
banks,  each  looking  out  for  itself,  we  should  have  twelve 
reserve  banks  of  varying  size  and  importance,  each  trying 
to  protect  its  own  reserves  and  the  interests  of  its  own  section. 
The  great  disparity  in  the  financial  strength  of   these  banks 


64 

would  give  some  great  advantages  over  others  in  this  contest. 
New  York  and  Chicago,  with  their  immense  resources  and 
foreign  connections,  if  relieved  from  responsibilities  for  other 
sections  of  the  country,  as  proposed,  could  easily  obtain  the 
gold  necessary  to  protect  themselves  and  enable  them  to  meet 
their  obligations.  Other  sections  might  not  be  as  fortunate. 
That  the  authors  of  the  plan  believe  that  it  could  not  be  rehed 
upon  in  emergencies  and  that  it  would  fail  when  a  real  concen- 
tration of  reserves  and  resources  was  necessary,  is  shown  by  the 
provision  that  the  central  board  may  require  one  reserve  bank 
to  rediscount  the  commercial  paper  of  another.  It  would  be 
almost  impossible  to  put  this  plan  of  relief  into  operation  with- 
out doing  more  harm  than  good.  Its  wise  administration  would 
necessitate  an  intimate  knowledge,  on  the  part  of  the  cen- 
tral board,  of  the  financial  conditions  and  loaning  power  of  each 
of  the  reserve  banks,  otherwise  the  transaction  might  of  itself 
precipitate  a  crisis. 

The  other  method  by  which  it  is  proposed  to  afford  rehef  to 
banks  or  communities  in  trouble,  is  by  a  transfer  of  govern- 
ment deposits  from  one  reserve  bank  to  another.  The  govern- 
ment cannot  afford  to  maintain  a  large  surplus  for  the  purpose 
of  transferring  it  from  one  section  to  another  for  relief  purposes. 
This  method  would  be  equally  perilous  with  the  other.  Trans- 
actions of  this  character,  as  well  as  the  enforced  discounts, 
would  appear  in  the  weekly  reports  of  the  reserve  banks,  and 
the  knowledge  that  a  bank  in  any  section  of  the  country  was  in 
such  need  of  assistance  as  to  demand  help  on  such  terms,  would 
be  likely  to  cause  a  run  upon  the  advertised  institution  and  the 
attempt  to  reUeve  might  not  only  prove  futile,  but  productive 
of  serious  results.  The  deposit  of  treasury  funds  in  1907  was 
efficacious  in  helping  to  restore  confidence,  but  in  that  case  the 
money  was  taken  from  the  treasury,  and  not  withdrawn  from 


65 

one  bank  to  be  deposited  in  another;  otherwise  the  beneficial 
results  would  have  been  lost. 

The  suggestion  of  these  questionable  methods  of  making  the 
resources  of  one  reserve  bank  available  for  the  reUef  of  another, 
discloses  the  inherent  weakness  of  the  plan.  To  be  effective, 
the  capital  and  resources  of  reserve  banks  must  be  concentrated 
under  the  control  of  some  central  organization. 

CONTROL  OF  FEDERAL  BOARD. 

As  I  have  shown,  by  the  terms  of  the  bill  national  banks  are 
obliged  to  furnish  the  capital  and  the  deposits  of  the  federal 
reserve  banks,  the  only  other  depositor  being  the  United  States. 
They  are  obliged  to  invest  a  part  of  their  funds  and  to  place  a 
considerable  part  of  their  resources  beyond  their  own  control 
or  to  submit  to  a  sacrifice  of  their  property  and  business.  This 
large  contribution  of  national  banks  is  placed  under  the  control 
of  political  appointees,  the  majority  of  whom  of  necessity  cannot 
have  the  knowledge  or  experience  to  qualify  them  for  the 
important  duties  assigned  to  them. 

The  national  banks  are  forced  into  the  position  of  stock- 
holders and  principal  creditors  of  the  reserve  banks.  The 
reserve  banks  are  forced  to  conduct  their  affairs  under  instruc- 
tions from  the  central  board,  and  yet  neither  the  reserve  banks 
nor  the  national  banks  are  allowed  to  participate  in  any  way  in 
the  management  of  the  central  board.  It  is  not  a  question 
whether  the  banks  are  to  be  permitted  to  control  the  board 
created  to  supervise  their  transactions,  but  whether  they  shall 
have  any  voice  whatever  in  the  management  of  their  own  prop- 
erty. There  is  nothing  in  our  form  of  government,  the  basic 
principles  of  democracy,  or  the  equitable  principles  which 
should  govern  the  organization  of  society,  which  warrants  any 
such  exclusion.     If  this  usurpation  of  the  rights  of  property  of 


66 

protesting  citizens  is  not  without  warrant  in  our  constitution, 
it  certainly  is  in  violation  of  every  principle  of  equity. 

The  attempt  is  made  by  the  friends  of  the  measure  to  justify 
this  exclusion  from  the  councils  of  the  proposed  government 
central  bank  by  a  reference  to  the  means  by  which  central 
banks  of  Europe  are  controlled,  but  a  comparison  of  the  man- 
ner in  which  the  central  banks  of  the  three  most  important 
commercial  nations  of  Europe  are  controlled  with  that  sug- 
gested for  this  government  central  bank  would  show  that 
no  precedent  can  be  found  in  European  practice  for  the  action 
contemplated  in  this  case.  The  question  at  issue  is  what,  if 
any,  voice  shareholders  have  in  the  management  of  European 
central  banks.  European  central  banks  have  no  control 
whatever  over  the  joint  stock  banks  or  their  management. 

A  comparison  of  the  manner  in  which  the  central  banks  of 
the  three  most  important  commercial  nations  of  Europe  are 
controlled  with  that  suggested  for  this  government  central 
bank,  is  of  interest  to  us.  With  a  very  few  exceptions  (Russia 
and  Sweden  are  the  only  important  ones)  the  central  banks  of 
Europe  are  private  institutions,  in  the  sense  that  their  shares 
are  held  entirely  by  private  owners,  but  the  character  of  their 
management  varies. 

In  the  case  of  the  Bank  of  England,  the  government  has 
no  voice  in  its  management,  nor  does  it  own  any  stock  in  the 
bank.  The  supreme  control  is  vested  in  the  governor,  deputy 
governor  and  24  directors,  all  elected  annually  by  the  share- 
holders. It  is  the  custom  of  the  shareholders  to  elect  mer- 
chants, representatives  of  important  business  houses,  to  mem- 
bership on  the  board,  and  to  exclude  directors  of  joint  stock 
banks,  and  brokers.  This  custom  is  undoubtedly  a  proper  one, 
and  is,  I  think,  adopted  universally  in  other  institutions  of  a 
similar  character.     I  have  never  heard  of  any  suggestion  that 


67 

a  different  course  should  be  followed  in  this  country.  The 
inclusion,  however,  of  merchants  as  the  principal  directors  of 
the  Bank  of  England  admits  to  membership  representatives 
of  all  the  greatest  banking  houses  of  the  world.  These  mer- 
chant houses  are  called  banking  houses  in  this  country,  and  on 
the  board  of  directors  of  the  Bank  of  England  are  found  the 
representatives  of  houses  like  the  Rothschilds,  Barings  and 
Morgans.  The  case  we  are  considering  is  not  one  as  to  who 
should  be  selected  by  shareholders  on  a  board  of  direction,  but 
whether  shareholders  should  have  any  representation  in  the 
management. 

The  Bank  of  France  is  a  private  estabhshment  and  the 
government  owns  no  shares.  The  management  of  the  bank  is 
in  the  hands  of  a  governor  and  two  deputy  governors,  who  are 
appointed  by  the  Chief  of  State  and  a  board  of  fifteen  regents 
(five  of  the  regents  must  be  chosen  from  the  commercial  and 
industrial  classes),  and  three  censors  (auditors)  who  are  elected 
annually  at  a  meeting  of  shareholders.  The  regents  correspond 
practically  to  the  board  of  directors  of  our  banks.  They  decide 
upon  all  important  matters  of  policy  and  management,  in- 
cluding the  fixing  of  the  bank  rate. 

The  administration  of  the  Imperial  Bank  of  Germany  is 
carried  on  by  three  boards:  (1)  The  Curatorium,  consisting 
of  the  Chancellor  of  the  Empire,  one  member  appointed  by  the 
Emperor,  and  three  elected  by  the  Federal  Council  from  its 
own  members.  The  board  meets  once  in  three  months  and 
very  rarely  interferes  in  the  actual  management  of  the  bank. 
(2)  The  Directorium,  or  board  of  managers,  consisting  of  the 
president,  vice-president  and  seven  others,  who  are  the  active 
managers  of  the  different  departments  of  the  bank  and  who  are 
appointed  for  life.  These  are  recommended  to  the  Emperor 
by  the  Federal  Council  and  appointed  by  him.    In  their 


68 

appointment  the  Central  Ausshuss  are  consulted.  (3)  The 
Central  Ausshuss.  The  powers  and  functions  of  this  board  are 
defined  by  the  Vice-President  of  the  Reichsbank,  Dr.  von 
Glasenapp,  as  follows: 

"The  third  body,  the  Central  Ausshuss  (which  takes  the 
place  of  our  directors) ,  is  composed  of  15  members,  who  are 
elected  at  the  annual  meeting  of  the  stockholders,  together 
with  15  alternates,  who  serve  in  the  absence  of  any  of  the 
members  of  the  board.  This  body  meets  once  a  month.  From 
among  their  numbers  they  appoint  a  sub-committee,  known  as 
deputies  of  the  Central  Ausshuss,  of  3  members  and  3  alter- 
nates. The  deputies  meet  weekly  with  the  president  and  mana- 
gers. The  Central  Ausshuss  are  made  familiar  with  the  trans- 
actions carried  on  by  the  bank  and  give  their  advice  and 
recommendations  to  the  Direktorium  in  reference  thereto.  In 
practice,  their  advice  is  generally  carefully  considered  and 
taken.  In  the  fixing  of  the  bank  rate,  it  is  their  custom  to 
call  a  special  meeting,  if  need  be,  of  the  Central  Ausshuss,  who 
always  confer  in  regard  to  the  advisability  of  a  change  in  the 
bank  rate. " 

MANAGEMENT   OF  BANKS. 

The  experience  of  banking  institutions  generally  establishes 
the  fact  that  the  best  results  are  obtained  by  leaving  the 
practical  management  of  banking  affairs  to  men  of  tried  capa- 
city and  experience,  whose  positions  are  of  a  permanent 
character,  and  whose  services  in  most  cases  command  large 
salaries  on  account  of  the  nature  of  their  responsibilities. 
Successful  banking  on  any  considerable  scale  can  be  carried 
on  only  in  this  way.  There  is  a  clear  distinction  between 
the  actual  managers  of  a  great  bank,  that  is,  those  who  have 
charge  of  its  technical  banking  business,  and  the  directors 


69 

who  pass  in  a  more  or  less  perfunctory  way  upon  the  action 
of  the  managers,  and  who  decide  upon  important  questions 
of  general  policy  affecting  the  bank.  This  distinction  is  rarely 
defined  by  law,  but  it  exists  in  all  well  managed  banking 
institutions.  It  is  sufficient  to  say  that  there  is  no  important 
banking  institution  in  existence  that  could  prosper  under  the 
sole  management  of  a  political  board  whose  membership  was 
certain  to  be  changed  at  least  once  in  four  years. 

SOCIALISTIC    CHAKACTER   OF  THE   BILL. 

I  am  aware  that  there  seems  to  be  a  marked  tendency  in 
recent  years,  in  some  quarters,  to  abandon  the  doctrine  that 
States  have  still  any  virile  powers  under  our  form  of  govern- 
ment, and  to  assent  to  the  concentration  of  all  powers  and 
authority  in  the  national  government,  to  be  exercised  through 
Congress,  or  in  later  days,  through  agents  of  the  executive. 
But  this  is,  I  think,  the  first  attempt  to  give  a  government 
board  the  right  to  manage  a  great  business,  which  is,  more 
important  in  its  intimate  relations  to  all  the  people  than 
any  other.  If  the  attempt  is  successful  it  will  be  the  first  and 
most  important  step  toward  changing  our  form  of  government 
from  a  democracy  to  an  autocracy.  No  imperial  government 
in  Europe  would  venture  to  suggest,  much  less  enact,  legislation 
of  this  kind. 

It  will  be  remembered  that  the  Federal  Reserve  Board  con- 
sists of  three  members  of  the  President's  official  family  and 
four  others  to  be  appointed  by  the  President  and  confirmed  by 
the  Senate.  One  of  the  four  members  is  made  manager  and 
executive  officer  of  the  board,  and  acts  under  the  supervision  of 
the  Secretary  of  the  Treasury,  who  is  made  chairman  of  the 
board.  It  is  provided  that  not  more  than  two  of  the  appointed 
members  shall  be  of  the  same  political  party.    These  pro- 


70 

visions  taken  together  fix  the  character  of  the  board  as  a  politi- 
cal organization.  Every  change  in  administration  means  a 
change  of  four,  and  probably  five,  of  seven  members  of  the 
board. 

As  I  have  shown,  the  powers  granted  to  this  central  board  are 
intended  to  give  it  the  control  of  the  functions  and  the  business 
of  the  reserve  banks  by  arbitrary,  direct,  or  indirect  methods- 
It  is  clearly  intended  that  the  government  of  the  United  States, 
through  these  instrumentalities,  shall  be  placed  in  a  position 
where  it  can  control  and  manage  the  banking  business 
of  the  country.  It  is  further  intended  that  government  obli- 
gations shall  ultimately  take  the  place  of  all  other  forms  of 
note  issues.  This  general  purpose  is  either  illy  concealed  or 
openly  announced  by  the  promoters  and  advocates  of  the  plan. 

The  creation  of  this  board,  with  its  improvident  grants  of 
executive  and  legislative  authority  is  repugnant  to  every 
fundamental  principle  of  popular  government.  No  instru- 
mentality could  be  further  removed  from  popular  control. 
The  functions  of  the  board  are  exercised  in  secret  and  there  is 
no  provision  for  publicity  of  any  kind,  except  an  annual 
report  to  Congress.  There  can  be  no  review  of  its  opinions 
and  no  appeal  from  its  decisions.  It  is  doubtful  whether  its 
members  could  be  impeached  for  flagrant  abuse  of  power. 
They  are  appointed  by  the  President  and  apparently  respon- 
sible to  him  alone  for  the  manner  in  which  they  discharge  their 
duties.  This  attempt  to  give  to  a  political  oligarchy  the  power 
to  control  the  banks  and  currency  of  the  country,  to  be  exer- 
cised at  its  discretion,  with  no  means  of  preventing  or  punish- 
ing abuses,  is  promoted  by  the  same  men  who  are  proclaiming 
their  purpose  to  destroy  monopolies  and  to  repeal  all  grants 
of  special  privilege.     No  monopoly  or  grant  of  special  privilege 


71 

could  be  so  great,  so  far-reaching  in  its  consequences,  as  that 
proposed  by  the  bill  under  consideration. 

The  proposition  that  our  government  has  the  power,  or  could 
properly  exercise  the  right,  to  take  possession  and  control, 
through  its  agents,  of  the  private  business  of  its  citizens,  has 
never  before  been  seriously  advocated  in  this  country.  No 
reason  can  be  given  why  the  United  States  should  take  over 
and  manage  the  banking  business  of  the  country  which  does 
not  apply  with  equal  force  to  any  of  our  important  indus- 
tries or  business  organizations.  In  other  countries  the  doctrine 
of  state  socialism  has  found  vigorous  support  from  a  limited 
class,  but  the  experiment  of  managing  private  business  by  gov- 
ernment agencies  has  not  yet  been  tried. 

The  creation  of  this  board,  however,  is  clearly  a  favor- 
able response  to  socialistic  demands.  The  aims  of  social- 
ism were  recently  defined  as  follows  by  an  acknowledged 
authority:  '^It  demands  that  the  machinery  of  wealth- 
creation  be  taken  from  the  individual  capitalist,  and  placed  in 
the  hands  of  the  nation  to  be  organized  and  operated  for  the 
benefit  of  the  whole  people.'^  There  could  be  no  more  accurate 
description  of  the  proposals  we  are  considering. 

It  is  urged,  in  answer  that  the  President,  having  only  the 
public  interests  in  view,  would  appoint  men  of  the  highest  class, 
men  whose  patriotism  and  loyalty  to  the  pubhc  interests  would 
be  unquestioned,  and  that  therefore  no  evil  results  could  follow. 
Good  appointments  will  undoubtedly  be  made,  but  legislators 
are  bound  to  take  into  account  the  possiblity  that  an  ambitious 
man  in  the  presidential  chair  might  use  the  great  powers  of  this 
organization  to  advance  the  interests  of  a  political  party  or  to 
perpetuate  an  administration.  A  President  who  had  the  power 
to  dominate  his  party  and  to  dictate  to  Congress,  if  he  were  at  the 
same  time  ambitious  for  the  succession,  might  be  tempted  to 


72 

use  for  personal  or  party  purposes  an  organization  of  his  own 
creation  whose  influence  for  this  purpose  would  be  irresistible. 

The  President  has  not  as  yet,  I  believe,  expressed  his  con- 
currence with  Mr.  Bryan  as  to  the  transcendent  importance  of 
government  note  issues.  In  his  earlier  days  he  was  enthu- 
siastic in  his  defense  of  the  Second  Bank  of  the  United  States. 
He  said :  ^ '  Only  a  great  commanding  bank,  everywhere  known, 
whose  notes  really  and  always  represented  gold  could  supply 
paper  worth  its  face  value  in  all  places  or  keep  exchanges  from 
chaos.  Such  an  agency  of  adjustment  and  control  the  Bank  of 
the  United  States  had  proved  itself  to  be.  It  had  not  only 
served  its  purpose  as  a  fiscal  agent  of  the  government  to  the 
satisfaction  of  the  treasury,  but  had  also  steadied  and  facili- 
tated every  legitimate  business  transaction  and  rid  the  money 
market  of  its  worst  dangers.  But  many  of  the  men  to  whom 
General  Jackson  was  accustomed  to  listen  believed,  or  affected 
to  believe,  that  it  had  done  much  more,  that  its  power  was  used 
to  serve  a  party  and  to  keep  men  who  were  no  friends  of  the 
people  or  of  popular  rights  in  a  position  to  manage  and  corrupt 
the  whole  politics  of  the  nation."* 

The  President  will  undoubtedly  concede  that  we  cannot 
adopt  the  Bank  of  the  United  States  as  a  model,  but  we  should 
certainly  seek  to  secure  the  qualities  and  results  which  he  so 
eloquently  ascribed  to  the  bank.  The  accusation  that  the 
Second  Bank  of  the  United  States  advanced  money  on  the  paper 
of  its  political  friends,  and  used  its  control  over  credits  to  per- 
petuate its  existence  and  to  defeat  General  Jackson  had  more 
effect  in  arraying  public  opinion  against  the  bank  than  any 
other  cause. 

The  bill  we  are  considering  was,  it  is  said,  prepared  by  five 
Virginians.     I  commend  to  these  gentlemen  the  serious  admoni- 

♦Woodrow  Wilson,  History  of  the  American  People,  v.  4,  p.  63. 


73 

tion  of  a  distinguished  son  of  Virginia,  the  friend  and  biographer 
of  Jefferson,  Professor  George  Tucker,  of  the  University  of 
Virginia.     He  said: 

'^  Those  who  administer  the  federal  government  must  be 
always  expected  to  have  a  vigilant  and  active  opposition;  in 
other  words,  there  will  always  be  two  great  political  parties 
in  the  country,  one  of  which  will  be  in  favor  of  the  administra- 
tion, and  the  other  will  be  opposed  to  it.  Now,  it  is  contrary 
to  all  experience  to  suppose  that  those  who  have  so  powerful  a 
machine  under  their  control  as  the  whole  banking  power  of  the 
country,  and  which  would  be  ten  times  as  great  as  at  present, 
by  being  undivided,  would  not  be  disposed  to  use  it  in  favor  of 
one  party,  and  against  the  other;  and,  if  skilfully  used,  what 
might  it  not  achieve?  The  power  of  the  late  bank  of  the  United 
States,  with  a  capacity  of  only  $35,000,000,  was  thought,  by 
some,  to  be  formidable  to  the  government  as  well  as  to  the 
state  banks,  and  this  was  one  of  the  principal  reasons  assigned 
for  putting  it  down;  but  what  was  its  power,  when  exerted 
against  that  of  the  government,  and  of  numerous  rivals,  com- 
monly equal  to  itself  in  any  one  place,  compared  with  what 
would  be  the  power  of  all  the  banks  united,  when  added  to  that 
of  the  government?  If  the  people  were  capable  of  being  bought, 
of  trafficking  away  their  rights  and  liberties,  a  government, 
provided  with  such  means,  might  be  able  to  purchase  them;  and, 
though  that  should  not  be  the  fatal  result,  such  an  accession  to 
the  power  and  patronage  of  the  government  would  make  the 
will  of  its  party  resistless;  and  we  know  that  no  tyranny  is 
more  merciless  and  unprincipled  than  that  of  party.  We 
every  day  see  the  men  who  compose  it,  tolerate  and  approve 
what,  as  individuals,  they  would  revolt  at.  We  may  then  infer, 
that  such  potent  means  of  influence  would  not  be  conferred  by 
any  people  possessing  the  smallest  degree  of  discernment,  or 


74 

jealousy  of  power,  and  that  in  this  country  the  experiment  will 
never  be  made  until  the  love  of  civil  freedom  shall  cease  to  find 
a  place  in  the  hearts  of  the  American  people."* 

I  feel  sure  that  it  is  not  necessary  to  remind  the 
Senate  committee  who  have  the  responsibility  of  recom- 
mending proper  legislation  upon  this  subject,  that  no  credit 
can  attach  to  any  Congress  or  administration  unless  the  legis- 
lation adopted  shall  prove  wise  and  effective.  The  features 
of  the  bill  to  which  I  have  called  attention  are  of  such  a  char- 
acter that  they  should  not  be  accepted.  I  have  tried  to  show 
that  the  House  bill  has  serious  defects.  It  appeals  to  the  popu- 
lists by  adopting  their  plan  of  note  issues;  to  the  socialists  by 
seeking  to  place  the  management  of  the  most  important 
private  business  of  the  country  in  the  hands  of  the  government ; 
it  seeks  the  support  of  bankers  in  great  centers  by  its  unex- 
pected discrimination  in  their  favor,  but  its  dangerous  doctrines 
and  unwise  methods  do  not  appeal  to  the  sound  judgment  of  the 
American  people.  The  bill  as  it  stands  with  its  partly  in- 
effective and  partly  dangerous  provisions  would  be  detrimental 
to  the  interests  of  banks,  with  the  exception,  perhaps,  of  the 
great  banks  in  the  central  reserve  cities.  Its  objectionable 
features  have  neither  the  support  of  pubhc  opinion  nor  the 
approval  of  the  banking  fraternity.  They  are  contrary  to  the 
teachings  of  political  economists  and  they  are  not  supported  by 
the  judgment  of  practical  men.  Its  immediate  enactment  is 
urged  by  its  sponsors  upon  the  plea  that  it  will  create  confidence 
and  furnish  remedies.  It  just  falls  short  in  its  beneficial 
features  of  accomplishing  a  wise  purpose  and  by  the  radical 
character  of  its  objectionable  provisions  it  threatens  to  upset 
business  and  to  produce  the  evil  results  which  it  was  projected 
to  cure.     Its  authors  have  not  ignored  the  lessons  of  exper- 

"CGeo.  Tucker,  Theory  of  Money  and  Banks  Investigated,  pp.  266-8. 


ience,  but  are  apparently  afraid  to  make  their  legislation  con- 
form to  its  teachings,  on  account  of  the  declaration  of  a 
party  platform. 

For  centuries  the  world  has  witnessed  recurring  waves  of 
popular  delusion  with  reference  to  the  magical  power  of  paper 
money  and  the  belief  that  wealth  could  be  created  by  the 
stamp  of  the  government  upon  pieces  of  paper.  The  losses 
occasioned  by  the  folly  of  one  generation  have  not  deterred 
their  successors  from  trying  the  same  experiment  and  with  the 
same  results.  It  is,  however,  a  source  of  satisfaction  to  the 
philosophic  student  of  history  to  realize  that  no  matter  how 
severe  the  attack  of  monetary  mania  may  be,  sooner  or  later 
sanity  will  return  and  intelUgence  regain  its  control.  We 
should  keep  in  mind  that  any  departure  from  sound  economic 
principles  will  surely  invite  new  disaster.  There  can  be  no 
permanent  and  satisfactory  solution  of  this  great  problem  so 
fraught  with  momentous  consequences,  until  the  American 
people  shall  be  satisfied,  after  careful  investigation  or  exper- 
ience, that  any  plan  proposed  or  adopted  will  surely  respond 
to  their  reasonable  demands  for  banking  and  monetary  reform. 
Questions  of  this  character  cannot  be  finally  settled  by  the 
majority  of  a  party  caucus  or  by  the  mere  force  of  executive 
dictation.  There  are  much  broader  questions  involved  than 
how  best  to  secure  an  advantage  to  a  political  party.  Any 
attempt  to  construct  a  plan  for  monetary  reform  upon  a  basis 
of  sectional  or  political  prejudices  must  fail.  The  enactment  of 
legislation  having  this  basis  will  raise  an  issue  that  will  surely 
overshadow  every  other  in  future  poHtical  contests. 

No  large  part  of  the  American  people  had  any  idea  that  the 
election  of  1912  involved  a  reopening  on  the  part  of  Mr.  Bryan 
and  his  friends  of  the  controversies  of  the  past  and  an  endeavor 
to  secure,  by  partisan  legislation,  the  triumph  of  the  doctrines  and 


principles  which  had  received  the  repeated  condemnation  of  the 
American  people  at  the  polls.  This  should  be  a  fight  in  the 
open.  The  party  in  power  has  no  accredited  mission  to 
reverse  these  repeated  judgments  and  to  fly  in  the  face  of  the 
concurrent  judgment  of  the  people  of  every  commercial  nation, 
based  on  universal  experience. 

Unless  the  teachings  of  an  unbroken  line  of  great  statesmen 
are  to  be  ignored,  the  features  of  this  bill  that  I  have  discussed 
must  be  rejected.  The  administration  that  should  force  upon 
the  American  people  by  arbitrary  methods  an  unwise  solution 
of  this  problem  will  merit  and  sooner  or  later  receive  the 
condemnation  of  thoughtful  men  of  all  political  parties. 

It  is  the  irony  of  fate  that  in  a  measure  whose  sole  purpose 
should  be  to  give  strength  and  stability  to  our  banking  insti- 
tutions and  to  furnish  the  people  with  a  currency  whose  value 
could  never  be  questioned  that  it  should  be  found  necessary  to 
sacrifice  the  principles  of  a  great  party  and  to  make  the  national 
banks  the  unwilling  instrument  in  the  work  of  their  own 
destruction  in  order  that  Mr.  Bryan  may  proclaim  to  the  world 
a  triumph  of  transcendant  importance  for  his  monetary  and 
governmental  theories. 

Let  us  hope  that  the  sober  second  thought  of  the  national 
legislature  may  lead  it  to  reject  false  doctrines  and  with  a 
patriotic  spirit  to  construct  a  plan  of  banking  reform  which  is 
worthy  the  intelligence  of  a  great  people  and  which  will  serve 
their  highest  interests. 


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<-'ir    34  1934 

OCT  25    1934 

6'''" 

SVP2  81955LU 

• 

LD  21-100m-7,'33 

./  "  '  •  o^ 


79 


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